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In addition to the introduction and conclusions, the thesis is structured into 03 chapters as follows: Chapter 1 General issues about the market risk management of commercial banks; Chapter 2 Market risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade; Chapter 3 Solutions to improving ability of the market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade.
MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNMAM THE BANKING ACADEMY HOANG XUAN PHONG HOANG XUAN PHONG MARKET RISK MANAGEMENT AT VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE FIELD OF RESEARCH: FINANCE – BANKING CODE: 62.34.02.01 SUMMARY OF DOCTORAL DISSERTATION HA NOI 2014 The dissertation is completed at: The Banking Academy Instructors: 1. Assoc. Prof., PhD. To Ngoc Hung 2. PhD. Hoang Viet Trung Opponent 1: Opponent 2: Opponent 3: The doctoral dissertation has been defended to the institutional level Jury at The Banking Academy At: ………… of………April 2014 The thesis can be found at the library of The Banking Academy and National Library of Vietnam. INTRODUCTION 1. The necessity of the project After the access into the World Trade Organization (WTO), the integration degree of Vietnam into the global economy has become increasingly deep and wide. The world integration can bring to the banks in Vietnam with opportunities to learn, to acquire administration experiences as well as make full use of advanced technologies, to diversify products and services from countries with developed economies However, the integration also raises many difficulties and challenges, of which the incalculable challenge for local banks is the force of risks in the business together with increasingly complex market factors, which have been liberated and appear more and more complex natures. It is because that: the higher the diversification of banking and financial products, the more the risk level is growing; the financial environment has changed constantly and is hard to be controlled and this is very likely to cause the domino reaction Meanwhile, Vietnam's commercial banks have still lacked practical experiences, been perplexed in operating and controlling the activities of currency trading. Therefore, in parallel with the comprehensive development goals, the good market risk management to create a stable business environment is now a great pressure over all commercial banks in Vietnam In that context, studying and managing the market risk to minimize the losses for commercial banks is a very important issue with theoretical and practical pressing significance both on the global level and in each country From the late 2002, to further enhance the tolerance of commercial banks against bad situations in business operations, as well as to ensure the safety of the system, the Commission on Banking Supervision headquartered in Basel has issued regulations to standardize the market risk management. Since then now, the tools and methods of quantifying the values with market risks have been improved and continuously invested. In recent years, Vietnam Joint Stock Commercial Bank for Industry and Trade has adopted a number of policies on minimizing the market risks in order to be able to stand strongly in the competition and determined to implement its strategies of building Vietnam Joint Stock Commercial Bank for Industry and Trade into a powerful financial conglomerate of Vietnam, the region and the world. However, under the current volatile economic environment conditions, interest rates and exchange rates , which have been changing constantly and unpredictably at various times, have brought considerable damages to the bank Also, due to lacking experiences, comprehensive views, socio economic conditions, and the application of market risk management standards in accordance with current international standards into activities of the commercial banks in Vietnam in general and of Vietnam Joint Stock Commercial Bank for Industry and Trade in particular is a very difficult issue and should be further discussed and clarified. From the theoretical and practical issues, I have choose the project titled: “ Market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade” in order to study and defend my doctoral dissertation. 2. Research situation So far, there have been many scientific research projects regarding the risk management at commercial banks such as Hennie van Greuing and Sonia Brajovic Bratanovic with the research named “ANALYZING AND MANAGING BANKING RISK” 2003. In their research, authors have mainly demonstrated the method of quantifying the market risks with the Value At Risk (VAR) techniques. Methods of calculating VAR include: Historical Method, The VarianceCovariance Method and Monte Carlo Simulation. Currently, there has been no project on the in depth research of this issue in Vietnam, however, it should mention the master thesis of Du Thi Minh “Managing exchange rate risk in forex trading operations at Military BankActual situations and solutions”, 2012, The Banking Academy; “Solutions to managing interest rate risk at Vietnam Bank for Agriculture and Rural Development” – the economic doctoral dissertation of the author Do Thi Kim Hao2005. In general, researches on market risk management at commercial banks in a comprehensive manner is very limited The sectorlevel scientific research project on "Methods of managing market risk at commercial banks in Vietnam", PhD. Pham Huy Hung coded KNH2008 02, 2010 is one of the most comprehensive research projects to date on the contents of market risk management in Vietnam. However, research objectives of the project focus on several methods of quantifying market risk and applying the above methods of quantifying for the commercial bank system in Vietnam Most of research projects in Vietnam have not yet accessed to the comprehensive market risk management at commercial banks in an overall manner, including interest rate risk and foreign exchange risk, not combined theoretical issues with practical operations in order to clarify the basic objectives and contents of the market risk management, generally researching methods for quantifying market risks; previous researches have not raised complete solutions, overall recommendations from models, procedure of market risk management, methods employed for administrating, forecasting market movements especially associated with the specific conditions of Vietnam Joint Stock Commercial Bank for Industry and Trade. The above “blank spaces” have suggested the author new research directions in order to well implement the dissertation. Therefore, it can be confirmed that the thesis titled “ Market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade” is the first doctoral dissertation which has systematically and comprehensively studied contents of market risk management at banks as theoretical basis for assessing the actual situation and proposing solutions to improving capacities of market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade 3. Dissertation objectives On the basis of clarifying the general theoretical issues about market risk, methods of identifying, measuring and controlling market risk, the system of market risk management softwares at commercial banks; analyzing and evaluating the status quo of the market risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade; the thesis proposed solutions to improving market risk management ability at Vietnam Joint Stock Commercial Bank for Industry and Trade in accordance with international practices 4. Research subjects and scope Research subjects of the dissertation: The theoretical and practical issues about market risks and market risk management at commercial banks Research scope: Managing market risk (including interest rate risk and exchange rate risk) at Vietnam Joint Stock Commercial Bank for Industry and Trade from 2008 to 2012 and vision up to 2015 5. Research methodologies Method of dialectical materialism and historical materialism, logical method, statistical and synthesic methods, other methods such as: comparative, inductive, deductive moethods 6. Contributions of the thesis The dissertation systematizes, clarifies theories on market risk management in the context of world economic integration and increasing competitive pressures in the business activities of commercial banks; introducing basic contents about market risk (within the scope: interest rate risk and exchange rate risk) of commercial banks Especially, the thesis has suggested ways of building a standardized system about market risk management at commercial banks from model, procedure and policy of market risk management; stating experiences about market risk management at some foreign commercial banks and drawn lessons for Vietnam Based on surveyed information, practical materials, the thesis has introduced the overview about Vietinbank, analyzing the status quo of the market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade, pointing out basic successes and shortcomings, weakness and causes of market risk management of the Bank as the basis for proposing innovation solutions, completing the market risk management of Vietinbank in the coming time The dissertation has recommended 06 systems of solutions appropriate to the conditions of Vietnam Joint Stock Commercial Bank for Industry and Trade from building the risk management framework in accordance with international standards; building, completing policy on market risk management; completing model, procedure, methods and tools of market risk management ; solutions to enhance modern technical equipments, set up risk management softwares; strengthening the predictabilities to training to the staff of officials in charge of market risk management to better implement the market risk management of Vietinbank market risk in the future 7. The dissertation structure In addition to the introduction and conclusions, the thesis is structured into 03 chapters as follows: Chapter 1: General issues about the market risk management of commercial banks Chapter 2: Market risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade Chapter 3: Solutions to improving ability of the market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade 10 Chapter 1 GENERAL ISSUES ON THE MARKET RISK MANAGEMENT OF COMMERCIAL BANKS 1.1. Market risk in operations of commercial banks 1.1.1. The concept of market risk The market risks may be defined as the possibility of loss to the bank cause by the changes in market variables. It is the risk that the value of on/ of balance sheet positions will be adversely effeced by the movements in equity and interest rate markets, currency exchange rates and commodity prices, or risks for earnings and capital of the bank due to changes in the market level of interest rates, prices of securities, foreign exchange and equities as well as the volatilities of those prices 1.1.2. Types of the market risks In general, the market risk includes interest rate risk, foreign exchange risk, securities risk and commodity risk. 1.1.2.1. Interest rate risk a. The concept of the interest rate risk The interest rate risk at commercial banks is potential losses which the bank shall bear when the market interest rate fluctuates The interest rate risk is the risk of fluctuations in income and net value of the bank when the market interest rate changes. b. Types of interest rate risks: The interest rate risk consists of three types: Outright Risk, Yield Curve Risk and Basic Risk c. Effects of the interest rate risk It affects the earning perspective of the bank It also has effects over the market value of assets 18 security risks are not popular with Vietnam commercial banks. Therefore, when working on issues of market risk management, this thesis only focus on 2 issues: interest rate risk management and foreign currency risk management 2.2.1. Real situation of interest rate risk management 2.2.1.1. Interest rate policy and fluctuation from 2009 to 2012 2.2.1.2. Regulations and organization of interest rate risk management Vietinbank has built interest rate risk management policy with targets of limiting the loss of interest rate income, maintaining market value of owner’s capital, utilizing market interest rate fluctuation with restructuring balance sheet in order to maximize its profits in risk limits defined by bank’s risk appetile. The bank also sets up operation regulations of interest risk management which defines clearly the function and duty of each department from Board of directors to professional departments In 2013, Vietinbank started to apply interest risk management regulations accordance with its business scale and activities. This creates good conditions to monitor and operate interest risk management effectively. The management model is described as below: 19 Figure 2.1. Interest rate risk management model of Vietinbank Source: Vietinbank 2.2.1.3 Interest rate risk management regulations of Vietnam Joint Stock Commercial Bank for Industry and Trade In 3/2013, Vietinbank set up regulations on interest rate risk management to define clearly function of business department (Front OfficeFO), risk management (Middle OfficeMO) and operation management (BOBack Office), in interest rate risk management according to Basel to monitor and minimize interest rate risk in business activities, define individual’s responsibility and works clearly 2.2.1.4 Interest rate risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade 20 Vietinbank manages the interest rate risks at two levels: transaction level and portfolio level, of which the former in more focused interest rate risk management at portfolio level In 2012, Vietinbank completed the design, officially applied and continuously upgarted the software system of assets liabilities management (ALM) to run to the transaction level under international practices, automatically report of term differences, revaluation under nominal term and behaviour, scenarios analysis reports on interest rate increase/decrease situation, etc in order to faciliate the Bank’s interest rate manegement activities . Asset liability management system is now on trial and will be on operation in 2013 Repricing terms of all loans are required to be adjusted based on the re pricing terms of fund mobilised and are controlled within establised limits by the bank To 31/12/2012, cumulative interest rate gap/assets of all the terms as below: Chart 2.: Cumulative interest rate gap When the interest rate increases, Vietinbank will take risks of net profit decrease of all the terms When the interest rate decreases Vietinbank’s profit will increase In fact from 31/12/2012 to now the interest rate decreased Interest risk management at transaction level All the credit contracts are required to include terms relating to interest rate risk prevention to ensure the Bank can hold initiative in coping with all the abnominal fluctuations of the market, lending interest rate must reflect the bank’s actual funding cost 21 Management through the Fund Transfer Pricing (FTP) From 02/04/2011, Vietinbank has implemented the fund transfer pricing system (FTP) following term matching principle for every single transaction in line with international practices. Depending on the orientation of the bank and market movements, the Head Office can change the fund price for each type of customers or products to give signals for each business unit to determine their lending fund/mobilization rate. 2.2.1.5. Using derivative products and forecasting interest rate fluctuation in Vietnam Joint Stock Commercial Bank for Industry and Trade Vietinbank has not used any derivative products to manage interest rate risk, because the deriative market in Vietnam has not been developed well However it has a seperated department with main function of analyzing market information and propose their forcast each week, month, period These judgements will be the foundation for the Board of managers to decide on interest rate risk management 2.2.2. Real situation of foreign exchange risk management 2.2.2.1 Policy and fluctation of exchange rate from 2009 up to now 2.2.2.2 Model of foreign currency trading and exchange rate risk management in Vietinbank Foreign currency trading of Vietinbank is a focused management procedure from the Front office (trading department) to back office (business capital payment department), and middle office (risk management department)’s role as a risk controlling department and giving reports Missions of FO, MO and BO are defined clearly to ensure transperancy and prevent conflict Each department has to transact independently and cross check each other FO does not implement the transaction payment, BO does not take direct transaction or write dealing slip. MO independently carries out the supervision of activities of FO 2.2.2.3 Exchange rate risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade a. Management with foreign currency position 22 Nowadays Vietinbank manages the foreign currency risk by foreign currency position limit. On the basis of State Bank’s foreign currency position regulation, Vietinbank builds and regulates foreign currency position for itself and its branches in each market period. Position limit is controlled and implemented by the capital market Department and monitored independently Market risk management department Table 2.: Foreign currency limits in bank branches FOREIGN CURRENCY LIMITS IN BANK BRANCHES Maintained foreign currency position Group USD Other currencies converted to USD Group 1 +/ 2,500,000.00 +/ 500,000.00 Group 2 +/ 2,000,000.00 +/ 400,000.00 Group 3 +/ 1,000,000.00 +/ 300,000.00 Group 4 +/ 500,000.00 +/ 200,000.00 Group 5 +/ 300,000.00 +/ 200,000.00 Regulations of transaction limits, loss limits with foreign currency trading in international foreign currency market: Table 2.: Foreign currency position and transaction limits, loss limits FOREIGN CURRENCY POSITION AND TRANSACTION LIMITS Foreign currency Foreign currency Dealer’s name Transaction limit position in day position overnight A 1,000,000.00 500,000.00 1,000,000.00 B 1,000,000.00 500,000.00 1,000,000.00 C 750,000.00 500,000.00 750,000.00 LOSS LIMIT (Unit: USD) Dealer’s name Day Month Year A 3,500.00 5,500.00 14,000.00 B 3,000.00 5,000.00 14,000.00 C 2,000.00 4,000.00 8,000.00 Total loss limit 12,000.00 20,000.00 50,000.00 b. Foreign currency balance At Capital market Department of Vietinbank there is always foreign currency position because of circulating capital flows by foreign currency every day. In order to limit exchange rate risk, Vietinbank has to provide 23 limits of foreign currency position, the balance of this limit needs to be maintained in order to prevent risks c. Exchange rate risk limit by exchange rate forecasting An important exchange rate risk limit method that Vietinbank is using is forecasting exchange rate in short term as well as in long term for foreign currency trading to have appropriate reactions to minimize the risk. e. Using derivative products to limit exchange rate risk: Vietinbank usually uses 3 derivative produts to prevent exchange rate risk: Forward contracts; swap contracts; future contracts (The Bank has not used option contracts) Chart 2.: Foreign currency trading sales of Vietinbank Unit: billion VND Source: Foreign currency trading report of Vietinbank 2.3. An overview of market risk management at Vietnam Joint Stock Commercial Bank For Industry And Trade 2.3.1. Achievements Market risk management at Vietinbank has been improved and accommodated with advanced technology to ensure the business efficiency as well as to meet the capital demands for large business corporations. Furthermore, the quality of human resources engaged in market risk management has also been more advanced 2.3.2. Weaknesses of market risk management and its causes 2.3.2.1. Weakness Lack of an overall framework for market risk management; primitive methods and tools; incomplete organizational structure, lack of experts on market risk management, inconsistencies between technology and reporting system. 24 2.3.2.2. The causes of weaknessess a. Objective causes The customer knowledge of methods and business about risk prevention are still limited; activities on the world currency market has taken place extremely complicated, which is adversely affect the business operations of the Vietnam commercial banks; transactions (risk management products) on foreign currency market in Vietnam has not yet developed enough for commercial banks to have an effective risk management method; State bank of Vietnam has been intervenes heavily in the financial with administrative order tools b. Subjective causes The understanding of risks and risk impacts of business officials are not thorough and profound enough; the training of human resources needs a lot of time and effort; the cost of the software for the risk management is too high; banks do not have the incentive mechanism to encourage staffs who work effectively . 25 CHAPTER 3 SOLUTIONS TO ENHANCE THE CAPABILITY OF MARKET RISK MANAGEMENT AT VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE 3.1. Development orientation of Vietnam Joint Stock Commercial Bank For Industry And Trade 3.1.1. General orientation 3.1.2. Orientation for market risk management of Vietnam Joint Stock Commercial Bank For Industry And Trade Completing the framework of market risk management; establishing a proper procedure of market risk management; quantifying measures of market risk; improving the quality of supervision and control over market risk 3.2. Solutions to enhance the capability of market risk management of Vietnam Joint Stock Commercial Bank For Industry And Trade 3.2.1. Building a market risk management framework with international standards Vietinbank should provide an overall strategy of market risk management, synchronize and resolutely implement that strategy effectively. Vietinbank can refer a sample of market risk management framework which is commonly used in the world as follows: 26 Figure 3.2 : Framework of market risk management Source: ING 3.2.2. Building and completing market risk management policy Vietinbank should build this policy in writing and shall specify as follows: The objective of the policy is defining the content clearly to limit and control the market risk Establishing uniform customs of market risk management for identifying , measuring , controling, supervising to reporting thoroughly. Specifying the departments and individuals who are responsible for the market risk management decision. Vietinbank Board of Directors should determine the acceptable extent of market risk Identifying the market risk limits. Stress testing of market risk policy. Back testing Defining the establishment and the use of market risk reports Calculating minimum capital requirements for market risk under the Basel 2 3.2.3. Completing the models, processes, methods and tools of market risk management 3.2.3.1. Completing the market risk management model Vietinbank has established Risk Management Committee and Assets and Liabilities Management Committee (ALCO) since 2006 to supervise and manage all types of business risk. In 2013, Vietinbank has begun to adopt a new method called " 3 stages of control " in terms of 27 form It is important for now and the next year is to uphold the responsibility and capability of the ALCO members. 3.2.3.2. Completing the market risk management procedures Completing the procedures and meeting all the requirements of Basel 2 in each following stage: (1) Identifying market risk (2) Measuring the market risk, including the collection of market risk data, building scenarios and assumptions, and last, calculating the level of risk, (3) Monitoring risk through market risk report and market risk assessment strategies (4) Controlling risks through risk limit and the audit process of market risk management 3.2.3.3. Finalizing market risk management method Managing market risk with Value at Risk method; Managing interest rate risk with Duration Gap method. 3.2.3.4. Completing limit instruments: Bank limits the market risk limits to be consistent with the business practices and risk appetite of Vietinbank in the following fiscal year and on a quarterly basis, or when there are changes in business plans or a large market fluctuations, on the basis of last year Income statement and the business plan of the following year 3.2.3.5. Using derivatives to shield the market risk This is a very effective tool to shield the market risk in both short and long term There are types of basic derivatives: Forwards, Swaps, Options and Futures. Vietinbank has not yet used the future. Besides, establishing a good relationship with other bank creates the opportunity to attract capital with good prices, thus also reducing market risk 3.2.4. Installing modern facilities, setting up risk management softwares Facilities and risk management softwares are important tools for managers to create an sufficient amount of accurate information about the risks in their operations 28 Vietinbank has successfully implemented their Bank and payment system Modernization project, called System INCAS (ICB Advanced System). However, in the future, Vietinbank still need to improve their information technology facilities 3.2.5. To enhance the predictability of market volatility It is an advantage for Vietinbank to have a department of specialist market analysis who can provide market volatility predictions in the future To enhance the ability to predict market conditions, including fluctuations in interest rates, the exchange rate are the important factor in the market risk management 3.2.6. Recruiting and training experts in market risk management Eventhough Vietinbank has many banking professionals but it still lacks experts in market risk management. Therefore, Vietinbank needs to recruit and train experts in this fields. 3.3. Implications 3.3.1. Implications to the government and related sectors It is essential to develop: a policy to support the increase in charter capital for Vietnam commercial banks to enhance their financial capacity; a policy of appropriate wage mechanism; a policy of reforming the Banking sector, including the state bank and commercial banks; encouraging independent auditing firm. Also, there is a need to review and revise laws, regulations and guidelines related to the activities of commercial banks 3.3.2. Implications to State bank of Vietnam Completing the exchange rates and interest rates policy ; Enhance the role of the state bank in organizing, managing and intervening in foreign exchange markets; completing the legal framework and regulations of the 29 measurement and risk management of Vietnam commercial banks; provide commercial banks with market risk management practice standards, supporting commercial banks in the training of professional staff. 3.3.3. Implication to Bankers Association Advising the state bank to establish the legal framework for the market risk management operation of commercial banks; studying, set up seminars, workshops about market risk management; acting as an intermediate for commercial banks in Vietnam to share knowledge and experiences in the process of looking for a partner, researching and developing market risk management system as well as sharing the data source of market risk in Vietnam; organizing research activities on market risk management implementation around the world. 30 CONCLUSIONS Over many years of remarkable growth with many comprehensive reforms of organization, management, technology, human resources, Vietinbank has made significant progress in banking business. However, Vietinbank has faced many losses due to market risk such as: macro economic disadvantages and the recent bulk development of new products Therefore, this doctoral thesis named: "Market Risk Management at Commercial Bank of Vietnam Joint Stock Commercial" were made theoretically and practically significant This thesis has successfully introduced the system of theories of market risk management, and an overview of international standards and advanced practices of market risk management in the world It also includes the examining of solutions and risk management market in a number of modern banks in the world, and on that basis clarify important issues to raise market risk management capability. Besides, this thesis clarifies and objectively assess the current situation of market risk management at Vietinbank, and proposes solutions to the market risk management as well as a number of implications and requirements for market risk management work for Vietnam commercial banks in general and Vietinbank in particular. Hopefully the updated information in the thesis will make a small contribution in the suggestion for the study, orientation and deployment of market risk management for the Management of Vietinbank banks, to meet practical requirements , to meet the international standards, increase competitiveness and raise the profile of Vietinbank in domestic and international market The Author of this thesis is very much looking forward to receiving comments and contributions of professors and Science Council to further improve his understanding, knowledge and research on the issue itself 31 LIST OF PUBLISHED RELATED RESEARCH PROJECTS OF THE AUTHOR Hoang Xuan Phong (2008), Vietnam Joint Stock Commercial Bank for Industry and Trade confirms the foothold and enhances its competitive advantages in the credit operations. Banking Magazine, Issue 5, March 2008, p.5860 2. Hoang Xuan Phong, (2013), Improving capacities of managing risks in foreign currency business at commercial banks, Banking Science and Training Magazine, Issue 131 of April 2013, p.4148 Hoang Xuan Phong, (2013), Improving capacities of interest rate risks in the commercial bank system in Vietnam, Banking Magazine, Issue 1 of January 2013, p.2730 Hoang Xuan Phong, (2014), Experiences in managing market risk of foreign banks, Banking Science and Training Magazine, Issue 143 of April 2014, p.7175 ... Solutions to improving ability of the market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade 10 Chapter 1 GENERAL ISSUES ON THE MARKET RISK MANAGEMENT OF COMMERCIAL BANKS 1.1. Market risk in operations of commercial banks... 2.1. Overview of Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) 2.1.1 Establishment and development of Vietnam Joint Stock Commercial Bank for Industry and Trade. .. SOLUTIONS TO ENHANCE THE CAPABILITY OF MARKET RISK MANAGEMENT AT VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE 3.1. Development orientation of Vietnam Joint Stock Commercial Bank For Industry And Trade 3.1.1. General orientation