Liquidity risk management in commercial banks

In modern economy, the development of commercial banks plays an extremely important role in the provision and transfer capital process. Commercial banks are always faced with variety of risks. One of the most dangerous types of risk that could fast and widespread make the bank insolvent, losing its reputation and even lead to the breakdown of the whole bank system is liquidity risk. The issue of ensuring reasonable liquidity is considered as one of the most essential tasks that must be respected in a regular, continuous and complete manner. This dissertation will study general theory combining with investigating the current state of liquidity risk management in Vietnam commercial banks in the period of 2008 2015. Then, researcher would like to propose many solutions and recommendations in order to improve the effectiveness of liquidity management in Vietnams commercial banks in the coming time.

Liquidity risk management in commercial bank Evidence from commercial banks in Vietnam (2008-2015) Abstract In modern economy, the development of commercial banks plays an extremely important role in the provision and transfer capital process Commercial banks are always faced with variety of risks One of the most dangerous types of risk that could fast and widespread make the bank insolvent, losing its reputation and even lead to the breakdown of the whole bank system is liquidity risk The issue of ensuring reasonable liquidity is considered as one of the most essential tasks that must be respected in a regular, continuous and complete manner This dissertation will study general theory combining with investigating the current state of liquidity risk management in Vietnam commercial banks in the period of 2008 - 2015 Then, researcher would like to propose many solutions and recommendations in order to improve the effectiveness of liquidity management in Vietnam's commercial banks in the coming time Key words: Liquidity, risks management, commercial bank, liquidity demand, liquidity supply TABLE OF CONTENT I INTRODUCTION A bank that has ineffective activities for many years may lead to the risk of bankruptcy soon But there is no guarantee that a bank that which has profitable will have no risks Banks business in a sensitive field which is called currency Those issues belongs to the field are always extremely considered because they could affect seriously on the development of banks in particular and economy in general In fact, banks encountered many difficulties while ensuring safety and the highest profit rate at the same time in their operating process From the end of year 2007 and beginning of 2008, liquidity problem became a hot issue in Vietnam society The shortage of Vietnam dong in 2007 made banks raised interest rates simultaneously while Vietnam State Bank must issue a tighten monetary policy to decrease inflation It means that the shortage of liquidity or borrowing from the interbank with high interest rates could affect to commercial banks in particular and the economy in general Banks must prepare themselves the ability to manage liquidity under any circumstances in order to invest money effectively, maximize profits as much as possible, reduce risks and avoid the risk of bankruptcy Hence, ensuring a reasonable level of liquidity is considered as one of the most urgent tasks that must be respected in a regular, continuous and complete manner In fact, there are many studies in both theoretical and practical which investigating on liquidity risk management with the aim of minimizing the risk to commercial banks Since late 2002, the Basel Committee has issued regulations regulating the bank's risk management including liquidity risk Along with it, the tools and methods of managing liquidity risk have been improved positively However, due to the limited practical conditions and limited experience, the application of current international liquidity risk management standards to the operations of Vietnamese commercial banks is not practical enough It still needs to be added many criteria to reflect the whole picture of liquidity of commercial banks in Vietnam Hence, I chose the topic “Liquidity risk management in commercial bank - Evidences from commercial banks in Vietnam (2008-2015)" to study for my master's thesis I.1 Statement of the Problem This dissertation is conducted in order to answer those questions below: a Which principles apply to liquidity risk management? b What is the current practice of liquidity risk management in commercial banks in Vietnam and how are their risk management structures? c What are the money market instruments of Vietnamese commercial banks available to meet the liquidity needs of depositors? d What factors affect Vietnam commercial banks in managing liquidity assets and liabilities, their liquidity management methods? e What are the liquidity risk mitigation measures? I.2 Research objectives In this dissertation, researcher will focus on studying general theory of liquidity risk and management combining with current state of liquidity management in Vietnam commercial banks in many recent years Based on the survey information, the actual thesis, this dissertation has analyzed the liquidity risk situation and liquidity risk management at many commercial banks in Vietnam That could reveal the causes of liquidity as well as factors affecting the liquidity management ability of Vietnamese commercial banks It is the basis for proposing solutions to prevent and limit liquidity risk Aim of research - Clarify the theoretical issues of liquidity risk, methods of determining, measuring and controlling liquidity risk; Tools to support liquidity risk management of commercial banks - Analysis and assessment of liquidity risk situation and liquidity risk management in Vietnamese commercial banks; Indicates the causes of liquidity risk for Vietnamese commercial banks - Proposing measures to prevent and limit liquidity risk and improve liquidity management capability at Vietnamese commercial banks in line with international practices I.3 Scope and limitation of the Study Due to the limitation of research time (2007 – 2014), this dissertation will rely on many general theories as well as the annual reports of Vietnam commercial banks to investigate current situation of liquidity risk and liquidity risk management in Vietnam The limitation of this research is only based on previous researches Because of time limitation, so researcher cannot collect data in a direct way This dissertation is done in systematic from the problem formulation, research purposes, data collection, and data processing There is no data has been manipulated and the research is not responsible to the other calculation based on another data that might be different by the other institution I.4 Significance of the Study The results of this research are expected to provide benefits for: Academic a The author hopes this analysis can contribute to the next generation of University in particular about proposing many useful methods to manage liquidity risk in commercial banks b This research can be an example to research outside the University Bank Users a This research can be a reference to select the bank that can facilitate and provide good and secure services for customers b Provide convenience to determine which banks will be used to show maps based on the liquidity risk management activities of commercial banks Bank a This study shows the picture of current state of liquidity in commercial banks as well as proposing many solutions to manage liquidity risks which can be useful for banks to gain their benefit stably b The author hopes the study will provide a positive impact by giving a better idea to reduce the bank’s weaknesses in managing liquidity risk The researcher: a This study is made to fulfil requirements to achieve a master’s degree b Make better understanding about liquidity definition and factors that affect to liquidity in II commercials LITERATURE REVIEW II.1 Overview of liquidity at commercial banks 2.1.1 Commercial bank Commercial bank is one of the most important financial institutions in the economy It is considered as the principal lender for millions of consumers such as individuals, households, enterprises and most local government agencies In a commodity economy, at a given time, there is always exists the fact that there are people who are temporarily own some money that still haven’t been invested, while there are people who need such amount of money (to meet consumer demand or effective investments) and they can pay a fee to have the right to use this money According to the law of supply and demand, they will see each other and then all (the lender, the borrower, and social) benefits both, production and circulation are developed and improved life Meet very diverse ways, and by the rise of commercial banks was born as a necessity and an important way, the most popular (Jesswein, Kurt R, 2006) Through the bank, the money can easily get an income that needs money can get the money needed at a reasonable cost It can be said that banks in particular and the banking and financial system in general are occupying an important position and extremely sensitive in the economy, relating to the operation of economic and social life More and more people are concerned to the activities of the bank, so what the bank is According to the bank statement published in 23-5-1990 of the State Council of Vietnam identified: "Commercial Bank is a monetary business organization that operates primarily and regularly receive deposits from customers with a responsibility in repaying that amount of money and use those amount to lend, make the discount and as a method of payment.” (Morris, 2002) Banking activities are considered as currency trading activities and banking services, with regularly content is receiving deposits and using this amount to supply credit and payment services 2.1.2 Liquidity at commercial banks 2.1.2.1 Liquidity and the need for liquidity management The basic function of the financial system is to provide liquidity One of the important tasks of bank managers is ensuring liquidity and maintaining liquidity at a reasonable level for the bank A bank is considered to have good liquidity if it can get the available funds at low cost at the time the bank needs It means that bank has good liquidity when it has certain amount of available capital at a reasonable scale, or a bank can quickly raise funds through credit or sale asset Unreasonable liquidity is the first sign which clearly show that bank is in financial trouble Quantity of bank deposit is declined, reducing the money supply and forcing the bank to sell liquid assets gradually Other banks will not lend the problem bank without additional guarantees or high interest rates This will lead to the decrease in income and threatening to the existence of banking institutions Many banks believe that liquidity can be borrowed at the right time So they think that there is no need to accumulate too much liquidity in the form of assets that easy to sell when needed at a stable price In fact, shortages have occurred in recent years, notably the insolvency that has led to bankruptcy in many major US banks in 2008 which proves that liquidity security is a requirement that cannot be overlooked Liquidity management is therefore more important than ever because the bank may be closed if it fails to mobilize sufficient liquidity In 1997, because of the financial crisis, many banks in Asia lose billions of dollars, panic customers, insolvent banks, bankruptcy or forced mergers US financial sector in 2008 combining with the collapse of big banks has indicated the importance of ensuring liquidity in the bank Hence, the commercial banks should focus on liquidity management and raising high liquidity efficiency as a daily issue because it relates to the existence and development of each bank and the whole system 2.1.2.2 Liquidity at commercial banks Liquidity of assets: A bank manager is always concerned about the liquidity of each asset and the asset portfolio The liquidity of each asset is the ability to convert assets into cash which is measured by time and cost The higher the time and cost of asset liquidity, the more likely it is to reflect the risk (loss) of converting assets into money over a specified period of time For a quick sale, the cost (or loss) is large This shows that the liquidity of an asset depends on many factors and may change depending on each regions and countries Banks hold asset portfolios with various kind of liquidity Asset structure with different liquidity characteristics creates a group of assets or total assets of liquidity Liquidity of portfolio assets is measured by the ratio of highly liquid assets to total assets (or on customer deposits at banks) Liquidity Source: The bank mobilizes capital to create assets, including highly liquid assets Thus, the ability to mobilize contributes to payment ability of banks The liquidity of the source is measured by time and cost which is used to expand the source The lower the time and the cost are, the greater the liquidity of the source Actually, the liquidity of the source depends on many factors such as the distribution development of the financial market, the increase in the income of the population and the sensitivity of the income to the interest Liquidity of a bank: The liquidity of a bank is the ability that bank can meet customer’s needs It is formed by the liquidity of the assets and the liquidity of the source It will be highly liquid when there are many liquid assets or are able to expand quickly with low cost or both, in line with liquidity needs Supply and Demand: Liquidity supply is the ability of a commercial bank to provide money to meet customer’s needs, (liquid assets holding and mobilize ability) Liquidity supply in bank includes: deposits from customers, sales of non-deposit services, repayment of customers' loans, loans from the monetary market Liquidity demand is the payment demand of the bank's customer that the bank is obliged to meet Liquidity includes legal claims and borrowing requirements of the client Liquidity needs of the bank include: Cash withdrawal from accounts, requests for loans from high quality credit institutions, repayment of non-deposit loans Cash and tax expenses appear in the production and service process, payment of cash dividends Liquidity risk: Liquidity risk is the loss that occurs when actual liquidity needs exceed the expected liquidity At that level, bank must increase the costs to meet liquidity demand which could lead to the decrease in bank's net income, at a higher level than the loss of liquidity that will lead to bankruptcy Liquidity Management II.2 II.2.1 Liquidity management objectives and rules II.2.1.1 Defining liquidity management objectives Liquidity is directly related to the safety and profitability of the bank Therefore, maintaining liquidity is an important objective throughout the bank's operations In order to increase liquidity, costs must also increase and this can reduce the bank's income For example, if the bank holds more funds or liquidity increases, the bank's earnings will decline as a result of low, even profitmaking funds such as cash in the bank In contrast, if the bank holds too little money, banks have to raise funds in case of emergency, which makes interest payments are higher than usual This can lead to the decrease in bank’s earnings Therefore, the bank's liquidity management objectives include: - Ensure timely payment of bank at reasonable cost - Predict liquidity risk and loss Rules of liquidity management II.2.1.2 Firstly, the liquidity manager must carefully observe activities of departments which relate to the mobilization activities or use of funds in bank and must coordinate the operations of the liquidity management department with those departments When the credit bureau issues a new credit line to client, the liquidation manager must prepare for the ability to withdraw funds from this credit limit Or if deposit department expect to sell large deposit certificates in the next few days, this information must be immediately submitted to the liquidity management office Second, the liquidator needs to know when and where the largest borrowers and the largest depositors will withdraw funds or deposit more money This allows managers to better deal with the occurrence of deficits and liquidity surplus Third, liquidity managers need to coordinate with senior manager to ensure that the objectives and priorities for the liquidity problem are clear In recent years, the state of liquidity is always a top priority in the process of allocating funds It is clearly that the bank cannot manage the funds (mainly deposits) because amount of deposit money entirely depend on the public However, the bank can manage the use of capital In addition, the bank must maintain a required reserve ratio at the central bank to meet its liquidity needs Bank must always be ready for withdrawal requirements, so manage liquidity and invest a reasonable portion of capital into liquid assets at all times are always top priority Today, liquidity management plays an important supporting role in the bank's core activities such as lending and providing other fee-based services Bank can make profitable loans and the liquidity management office will be responsible for finding financing Besides, liquidity needs must be constantly researched to avoid a surplus or liquidity shortage Liquidity surplus means if bank does not invest additional capital, bank’s income will be reduced At the same time, liquidity shortages forced banks to respond quickly to avoid selling assets or capital to meet liquidity needs Content of Liquidity Management II.2.2 Liquidity demand II.2.2.1 a Liquidity demand is the demand for available capital which primarily arises from two main sources: the demand for withdrawals and demand for loans from customers In addition, loans from other banks or central banks also increase liquidity demand 10 No Bank Economy mobilization Economy loans SOCBs CBs JVBs 31/12/2007 707.03 346.62 88.12 31/12/2007 578.29 286.2 66.42 6/6/2008 605* 412* 90* Data statistics source: 9/6/2008 560* 350* 82* According to SBV (*) According to estimates Table 2: Estimates of source disparities and sources of commercial banks in Vietnam No Bank Variation and use of source SOCBs CBs JVBs Total -100 -63 -9 -172 Data source: According to SBV statistics In 2015, although lending activities of commercial banks recorded high growth, the liquidity in the money market remained quite plentiful and stable Interbank interest rates fluctuated in the 2-4% range throughout the year with average trading volume of VND 7.600 billion, down 10% y / y (Giang, 2015) On the open market (OMO), the flow of capital via the SBV's net inflow / outflow channel was more active than last year, reaching an average of VND6,565 billion / week in the first 11 months, three times higher than the average in 2014 Factors such as GDP, inflation, credit growth, bad debt ratio, interbank interest rates, loan / deposit ratio (LDR), interest rates Margin (NIM) are used to measure liquidity.In general, these factors in 2015 are more positive than the period 2010-2014 when the credit growth rate in parallel with the growth of the economy (Giang, 2015) 33 At the same time, other factors such as inflation, interbank lending rates, LDR ratios, bad debt ratio were almost opposite from those in 2010 In particular, low inflation also facilitates the real interest rate of depositors standing at the highest level in many years (5.7% per annum) Therefore, despite the current lower deposit interest rates, the growth rate of deposits is not equal to 2014, but the level of liquidity of banks is still guaranteed IV.2 IV.2.1 Current state of liquidity management in commercial banks in Vietnam Achievement in liquidity management in commercial banks 4.2.1.1 Ensuring the liquidity of the economy After the fluctuations of 2008, the SBV promulgated many correct and effective policies Thus, the current liquidity situation is quite good; the interest rate in the interbank market has not high as 2008 As of the end of 2008, Vietnam's commercial banks seemed to well against inflation and the global economic crisis Interest rates for deposits and loans have been adjusted lower by banks to ensure that businesses or individuals can borrow capital at low interest rates Liquidity problems are treated effectively by banks Banks are out of liquidity shortages compared to the first half of 2008 At present, the liquidity management of banking system has been improved compared to the period time of 2008 due to the slowdown in inflation; the SBV has promulgated policies to support the banks which encounter difficulties in liquidity management However, because the inflation situation in the economy is still complicated, then liquidity management of banking system is still the top concern of bank managers 4.2.1.2 Enterprises can get loans at reasonable costs 34 According to SBV, in the second half of 2008, banks lowered their lending rates BIDV was the first bank to announce a reduction in lending rates BIDV announced a fell by 0.2% interest rate which was applied to BIDV's customers Particularly, businesses in priority sectors will be offered a 0.6% discount on short-term loans These companies include key projects of the Government, oil and gas, cement, electricity, iron and steel, exporters, enterprises producing essential commodities such as pharmaceutical, food, food, water, and transport When liquidity issues were stabilized, banks cut back on lending rates to share the hardships of businesses and encourage industries to prioritize development, and industries that generate large macroeconomic balances as the growth of the economy The need to attract savings deposits by all means of the bank will also reduce As a result, interest rates will be less stressed As of midJune 2016, the State Bank of Vietnam (SBV) announced that bank deposit balances at SBV continued to increase at a relatively high rate 4.2.1.3 Ensure system security The banking sector acted as the core not only to administer tight monetary policy but also to ensure the liquidity of the economy, thus contributing to effectively restraining inflation, stabilizing the macroeconomic and sustaining growth of the country In the difficult context, commercial banks continue to ensure safety of the system, actively innovate modern technology, increase capital, and supplement legal institutions, bankers increasingly in 2015 4.2.2 Limitations and Causes 4.2.2.1 Limitations The explosion of new banks has affected on the confidence of people over the management capacity including the liquidity problems of banks 35 Since the second half of 2006, the SBV has continuously received applications for establishing of new bank with the figure of 20 units in November 2007 This number continued to increase sharply in the first half of 2008 and then decreased according to government policy 2015 is the last year the banking sector implemented the project of restructuring the system of credit institutions in 2011-2015; many resolutions were implemented by SBV to re-structure the target It was indispensable to merge small banks with large banks, especially in the current fierce competition, if not expand the scale and improve strength, small banks will hardly exist Over the past time, the market has witnessed many successful mergers, banks were bought at dong, the system was purged and so far the system has 36 banks and the market was rearranged in a new order The growth of new banks also means that the banking sector would cope with many disturbances in regulatory capacity and the competition of new banks If banks continue to establish while the level of staff and management is still weak then banking system will not effective and also become a burden for the economy In the period of 2008, the liquidity management in commercial banks encountered great difficulties The shortage of dong and the interest rate race in commercial banks affected not only the loss of commercial banks in particular but also great impact on the entire banking system and economy in general Outdated technology: Although the domestic banks have recently stepped up the modernization of the banking information system, the efficiency of the investment is not good Especially, in management process, liquidity has not been equipped advanced technology to build an early warning system to help banks avoid one of the most dangerous risks that can lead to bankruptcy any time – liquidity risks 4.2.2.2 Causes 36 The recent liquidity problems of Vietnam may be due to a Subjective reasons Firstly, due to growth of credit in commercial banks was 53.89% in 2007 The "overheating" credit growth in commercial banks accompanied by the unreasonably investments in real estate created high risk when the market freezes or imbalance between assets and liabilities because bank use too much short term capital to make long term loans This has created a high liquidity risk for commercial banks Secondly, the forecasting and market analysis of commercial banks in Vietnam is still limited The commercial banks usually rely on the state mechanism while foreign banks often active in researching and forecasting serious compliance and safety rate in market movements Thus, they have plans to reserve for liquidity and timely adjustment Then, they are unaffected by the impacts of the market Thirdly, link between commercial banks system to ensure payment safety is still weak which create unhealthy competition, pushing up interest rates to create a gap for customers to deposit "to price, increase interest rate "or withdraw money transferred to other commercial banks This is the main cause which weakens the ability to resist the lack of liquidity of the system Lastly, the liquidity management in commercial banks is not good Due to the weakness of debt assets management, the presence of commercial banks and the lack of effective management tools State Bank is difficult to grasp the liquidity situation as well as the big changes in assets of each commercial bank to adjust its regulations b Objective reasons Firstly, from the customers, this is considered as the reason why banks are difficult to use the market tools to effectively regulate the liquidity of banks 37 When the information is not transparent, some customers (including legal entities) withdraw money from this bank and move to another bank, withdraw money to buy gold, buy US dollars to hoarding which increase the instability of domestic and foreign currency markets The second factor is considered as the business environment The inflation and monetary policy of the SBV in the end of 2007 and the first half of 2008 and a series of instruments such as raising the compulsory reserve ratio or issuing bills with the objective factors pushed commercial banks into the unprecedented liquidity situation Thirdly, technology is still weak because Vietnam is still in the development stage Therefore, it is very difficult to have high-tech products Instead, Vietnam Commercial Banks have to learn step by step 4.3 Solutions to improve liquidity management in Vietnam commercial banks 4.3.1 Development orientation of Vietnam commercial banks 2018 is forecasted to be more difficult than 2017, so the task set for Vietnam commercial banking system in 2018 is very difficult and challenging The focus development orientation falls into four main issues: Firstly, the role of the banking system, monetary policy is decisive The bank must provide a suitable policy to combat economic downturn, stimulate investment, forecasting, analyzing, evaluating and grasping the situation so as to take initiative in executing Secondly, banks should manage the interest rates and exchange rates flexibly and efficiently, contributing to stabilizing the macro-economy, ensuring the system's safety by ensuring the liquidity of the banking system but simultaneously satisfying sufficient capital for the economy Besides, solving the problem of current interest rates is very important 38 Thirdly, banks should improve banking systems, both in terms of financial capacity and credit quality, technology innovation and modernization, human resources training for effectively management and administration Especially, controlling of bad debts is one of the most important issues because they tend to increase in the coming time Fourthly, banks should improve the monetary and banking institutional system, strengthen inspection and control, ensure the operation of the banking system more safely, effectively and flexibly to meet the requirements of the market economy which is managed by the state 4.3.2 Solutions 4.3.2.1 Flexible use of theories in liquidity management: Theories of liquidity show the dialectical relationship between liquidity supply, demand management and the bank's operating environment Therefore, it is necessary for banks to master the theories to apply in liquidity management flexibly 4.3.2.2 Develop a strategy for asset and liability management that improves liquidity management Banks need to establish a liquidity management strategy immediately by planning and anticipating changes in deposit and lending flows as many changes in profitability 4.3.2.3 Improve business performance This is a measure that is quite basic to manage liquidity in the prevention and treatment of liquidity problems In banking, the quality of human resources and technology plays a very important role These are also two of the four vital factors involved in the existence, development, and integration of any commercial bank, namely Total Assets, Modernization human resources and strategic management in accordance with international standards 4.3.2.4 Raising the level of management and bank staff 39 Human is always considered as the top concern for any financial institution or business that wants to business successfully Therefore, the training of staff, improving professional qualifications must always be put on top 4.3.2.5 Development of technology products in banks Commercial banks need to develop a holistic strategy for IT banking development, select technical solutions that fit in with the global trend, and follow an open, scalable approach in the coming years At the same time, the application software is suitable for Vietnam conditions to computerize the operations in a synchronous and automatic manner according to international standards On that basis, implement advanced technology transfer, effective technology transfer to shorten the lag gap, promptly promulgate the legal system in sync with the application process It can be seen that the human problem in governance and the level of technology modernization are all very important factors If risk management helps to prevent sudden disruptions, management and technological modernization will have a major impact on competitiveness As US banks have not had a strong presence in Vietnam, there will not be a significant gap in the current market due to the collapse of major US banks There will be no major turmoil as some banks have taken the chance to snatch the market However, if domestic banks not improve their ability to manage and modernize the technology, the advantages gained by the protection will gradually disappear And it will be even more difficult for domestic banks As foreign banks have begun to be licensed by our government to open a branch in Vietnam, if these restrictions are not improved, it is important to improve the quality of services Any business sector and the banking industry is no exception 4.3.2.6 Strengthen risk management and internal controls 40 Banks need to strengthen risk management especially the operational risk, avoiding the maximum signs and phenomena associated with this type of risk This will always be a risky and sensitive type of risk Banks should build a comprehensive risk management model on all four issues: processes, people, systems and external events This model should be organized in three levels from the Operational Risk Management Board, the Operational Risk Management Committee to the Operational Risk Management The operational risk management division will consist of three divisions: the self-assessment process of the professional sections, the specialized risk management department and the internal audit department It is modeled after the ING (Internationale Nerderlanden Groep) model and has been successfully implemented This model is also equipped with tools such as periodic report of key risk indicators by day / week / month Reporting on traffic lights based on predetermined risk limits will help to detect operational risks early in order to have preventive and operational risk mitigation measures Business banking is very sensitive, involving many different sectors of the economy, related to the operation of businesses and individuals When a bank faces major risks, it can lead to panic and panic among bank depositors, making it not only risky but also systematic Therefore, we continue to add policy adjustment, develop and complete risk management processes, improve organization and operation of inspection, Internal controls at commercial banks are issues that need to be considered, focusing on creating trust for customers and the public in the current context Credit risk management systems should focus on improving the quality of customer analysis, credit rating, credit approval and control systems Effectively applying quantitative credit risk models has been applied around the world as a powerful tool in making good decisions 41 Banks should continue to improve the models of market risk management (liquidity monitoring and control system, interest rate risk and foreign exchange risk) in the direction of advanced and modern Establishment of service database for risk analysis and application of technology, use of modern risk measurement methods to ensure appropriate, affordable, affordable risk management and risk management policies and high efficiency Accompanying risk management is the operation of the internal control system This system of banks should ensure the level of adequacy, effectiveness and effectiveness Internal control inspection work is not limited to post-inspection work in the form of inspection, detection Errors that have arisen that improve the ability to detect, prevent and manage risk In addition, the role of internal control should be strengthened, independent evaluation of the operation of the internal control system; recommendations should be made to improve the internal control system at the bank 4.3.2.6 Agreement between commercial banks to ensure safety of payment and create a healthy competitive environment Banks should also have the opposite strategy to exploit the merger / acquisition opportunities of banks This is one of the solutions that can bring confidence and balance in terms of liquidity or also the opportunity to increase the interbank lending with relatively good and less risky instead of lending Although the issue of acquisition / merger is quite new and strange for banks and enterprises in Vietnam, but this issue is quite common on the world and Prof Tran Dinh ThienHead of the Vietnam Economics Institute said that " it is possible to have the concept of business crisis in the crisis, every bank can look for opportunities in crisis ,so this crisis risk will be pushed far away.” 4.4 Request 42 4.4.1 State Bank 4.4.1.1 Stabilizing the macroeconomic environment Inflation: it is necessary to control inflation gradually In other words, inflation must be protected by the liquidity of the commercial banks It should be noted that the relationship between inflation and exchange rates as well as the petrol price and inflation, must be carefully assessed before the implementing the state’s policy Exchange rate: The SBV should take suitable methods to avoid the possibility of currency crisis and applying a flexible exchange rate Consistency in the objective of monetary policy: The SBV should be consistent in its aim of monetary policy which is identified as grow or fight inflation In summary, State Bank needs to stabilize the macroeconomic environment which is ensuring that people have jobs, stable incomes, and increase the accumulation of savings It is considered as the basic foundation for improving the capital mobilization of commercial banks In accordance with fighting with inflation and stabilizing the currency, it is necessary to maintain steady growth rate to control all signals of the market, help the economy stabilize, maintain the domestic currency 4.4.1.2 Complete the legal corridor It is necessary to build a legal corridor and banking law system of Vietnam by international standards and the WTO The government should issue a formal notification of recognition and adhere to international ICC practices 4.4.1.3 Strengthening inspection and supervision of credit institutions and building an early warning system 43 It is necessary to improve the quality of financial analysis and to develop an early warning system that is not currently available in Vietnam The State Bank of Vietnam needs to develop policies to control and bind commercial banks in the business environment in accordance with the safety objectives to ensure macro-economic management in order to develop safety In addition, the State Bank should have its own financial reserve plan to timely prevent the risk of breakdown spread throughout the system There should be regulations on assisting banks in liquidity management to promote the inspection role of the SBV and to perfect the organizational model of the banking inspection 4.4.1.4 Promote the activity of the derivatives market Derivatives market is one of the best ways to limit risk to participants in financial market Therefore, the government and SBV need to promote and pay more attention to the operation of this market It helps Vietnam's financial market to be able to cope with the risks which arise from its business operations and to ensure safety for participants as well as the whole system 4.4.2 Commercial banks 4.4.2.1 Addressing the relationship between source and using source Commercial banks need to improve liquidity reserves especially in case of high inflation People are sensitive to rumors that can lead to potential risk of currency crisis Therefore banks should develop models for liquidity supply and demand in order to be proactive in anticipating into market volatility These models often employ different statistical techniques, along with managerial judgment and experience in order to develop forecasts for loans or deposits 4.4.2.2 Promoting development There is necessary to strengthen cohesion and cooperation among banks to: 44 Firstly, it is possible to exploit the competitive advantage of each other, jointly develop products and services, attract customers, save costs and increase operational efficiency Secondly, they can support one another in terms of liquidity when market fluctuations are unfavorable Cooperation between commercial banks not only contributes to inflation control, macroeconomic stability and economic development of the country, but also to the interests and development of the business community, including commercial banks V CONCLUSION In conclusion, after a long period of economic growth at high speed, the macroeconomic environment is stable, starting from the end of 2007 and the first few months of 2008, Vietnam's economy has encountered many fluctuations during that time Vietnam has fallen into high inflation In order to prevent this situation to restore the economy, government has promulgated many policies including tightening monetary policy which is used to help commercial banks in the situation of unprecedented liquidity In addition, the US financial crisis and the collapse of a series of large banks in the world had caused many influences on economic activities in general and activities of commercial banks in particular It means that liquidity problem in commercial banks involves with all members of the economy from the central bank to commercial banks Liquidity risk is considered to be a daily risk but also the most dangerous risk that threatens the existence of not only each commercial bank, but also affects the safety of the whole system Loans in commercial banks are an issue that cannot be overlooked This research focuses on general theory and current situation of liquidity management in Vietnamese commercial banks in recent years Researcher also provides some suggestions and solutions to improve the efficiency of liquidity management in commercial banks in particular 45 and efficiency in economic management in general In future, Vietnam's banking system will surely encounter many big challenges Therefore, we need to implement comprehensive solutions to improve management efficiency in commercial banks, bringing Vietnam's growth and stable development to integrate into the regional and world economy REFERENCES Danh, L V (2006) Tiền hoạt động ngân hàng NXB Khoa học kỹ thuật Gatev, Evan, Til Schuermann, Philip E Strahan (2004) How Banks Manage Liquidity Risk? Evidence from Equity and Deposit Markets in the Fall of 1998 Giang, N (2015, 12 23) Năm 2015, khoản hệ thống ngân hàng ổn định! Retrieved 10 10, 2017, from Taichinhplus.vn: http://taichinhplus.vn/TIEN-TE/Ngan-hang/Nam-2015thanh-khoan-he-thong-ngan-hang-van-on-dinh-post156779.html Gonzalez-Eiras, Martin (2004) Banks Liquidity Demand in the Presence of a Lender of Last Resort working paper Universidad de San Andres, Buenos Aires Gup & Kolari The Management of Risk India: Replika Press Pvt Ltd Hà, P T (2006) Giáo trình ngân hàng thương mại NXB Thống kê Jesswein, Kurt R (2006) International Banking and large community banks: a prelimiinary look Journal of commercial Banking and Finance 46 Morris, R (2002) A look about commercial bank in Vietnam The Journal of commercial Bank Mùi, N T (2005) Quản trị ngân hàng NXB Tài Tiến, N V (2006) Quản trị rủi ro kinh doanh ngân hàng NXB Chính trị quốc gia Tư, L V (2003) Quản trị ngân hàng thương mại – , NXB Thống kê Tạp chí ngân hàng (2008) Retrieved 10 10, 2017, from http://tapchinganhang.com.vn/ https://www.sbv.gov.vn/ 47 ... measuring and controlling liquidity risk; Tools to support liquidity risk management of commercial banks - Analysis and assessment of liquidity risk situation and liquidity risk management in Vietnamese... which investigating on liquidity risk management with the aim of minimizing the risk to commercial banks Since late 2002, the Basel Committee has issued regulations regulating the bank's risk management. .. on studying general theory of liquidity risk and management combining with current state of liquidity management in Vietnam commercial banks in many recent years Based on the survey information,