Quản lý rủi ro danh mục cho vay tại các ngân hàng thương mại việt nam tt

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY OF VIETNAM NGUYEN BICH NGAN SUMMARY OF DOCTORAL THESIS CREDIT RISK MANAGEMENT ON LOAN PORTFOLIOS IN VIETNAMESE COMMERCIAL BANKS Major : Finance – Banking Code : 9.34.02.01 Academic supervisors : Assoc Prof., Dr Nguyen Thuy Duong Dr Nguyen Tien Dong HANOI, 2020 i TABLE OF CONTENTS INTRODUCTION 1.Necessity of research topic 2.Research objectives of the thesis 2.1.General research objectives .2 2.2.Specific research objectives .2 3.Object and study scope of the thesis .3 3.1.Object of the study 3.2.Scope of the study 4.Research methodology of the thesis .3 5.New contributions of the thesis 6.Structure of the thesis CHAPTER 1: OVERVIEW OF RESEARCHES ON CREDIT RISK MANAGEMENT ON LOAN PORTFOLIO IN COMMERCIAL BANKS 1.1.1.Researches on organizational model of risk management on loan portfolios 1.1.2.Researches on information reporting principle between divisions in organizational structure of risk management on loan portfolios .10 1.2.Researches on risk identification on loan portfolios 11 1.2.1.Researches on credit risk early warning system 11 1.2.2.Researches on loan portfolios’ past quality evaluation models 11 1.3.Researches on risk measurement on loan portfolios 12 1.4.Researches on using loan portfolio risk management tools .12 1.4.1.Researches on modern tools 12 1.4.2.Researches on traditional tools .13 1.5.Research gaps 14 CHAPTER 2: THEORETICAL BACKGROUND FOR RISK MANAGEMENT ON LOAN PORTFOLIO IN COMMERCIAL BANKS 15 2.1.1.Concept of credit risk management in commercial banks 15 2.1.2.Principles of credit risk management in commercial banks 15 2.1.3.Contents of credit risk management in commercial banks 16 2.2.Theoretical background for loan portfolio risk management in commercial banks 16 2.2.1.Concept of risk management on loan portfolios in commercial banks 16 2.2.2.Contents of risk management on loan portfolios in commercial banks 17 2.2.3.Factors affecting risk management on loan portfolios in commercial banks 18 2.3.International experiences of loan portfolio risk management in commercial banks .18 2.3.1.Experiences of Japanese commercial banks 18 2.3.2 Experiences of Korea Development Bank (KDB) .18 2.3.3.Experiences of Bangkok Bank 19 2.3.4.Experiences of Citibank 20 2.3.5.Lessons learned for Vietnamese commercial banks .21 ii CHAPTER 3: CURRENT SITUATIONS OF CREDIT RISK MANAGEMENT ON LOAN PORTFOLIO IN VIETNAM COMMERCIAL BANKS .23 3.2.Current situations of loan portfolio risk in Vietnamese commercial banks 23 3.2.1.Regarding the ratio of NPLs on loan portfolios 23 3.2.2.Regarding loss rate on loan portfolios 23 3.2.3.Regarding credit concentration on loan portfolio 23 3.3.Current situations of risk management on loan portfolio in Vietnamese commercial banks 24 3.3.1.Regarding organizational structure of credit risk management on loan portfolios .24 3.3.2.Regarding risk identification of loan portfolios 25 3.3.3.Regarding risk measurement of loan portfolios 25 3.3.4.Regarding the use of loan portfolio risk management tools 26 3.4.Assessment on current situations of risk management on loan portfolio in Vietnamese commercial banks 27 3.4.1.Obtained results 27 3.4.2.Limitations and reasons 28 CHAPTER 4: SOLUTIONS FOR IMPROVING CREDIT RISK MANAGEMENT ON LOAN PORTFOLIOS IN VIETNAMESE COMMERCIAL BANKS .30 4.1.Orientation of credit risk management in Vietnamese commercial banks 30 4.2.Solutions for improving credit risk management on loan portfolios in Vietnamese commercial banks 30 4.2.1.Regarding organizational structure of risk management on loan portfolios 30 4.2.2.Regarding risk identification of loan portfolios 31 4.2.3.Regarding risk measurement of loan portfolios 31 4.2.4.Regarding the use of loan portfolio risk management tools 34 4.3.Recommendations for the State Bank of Vietnam 35 4.3.1.The recommendations for the SBV to support and promote the application of modern credit risk measurement models in commercial banks 35 4.3.2.The recommendations for the SBV to manage and supervise loan sale activities 36 4.3.3.The recommendations for the SBV as the market manager of credit derivative transactions of Vietnamese commercial banks 36 RECAP 37 LIST OF PUBLISHED WORKS RELATED TO THE THESIS 39 iii INTRODUCTION Necessity of research topic Lending is the key business of most commercial banks, therefore, the loan portfolio makes up the largest proportion of the total assets and also generates the largest source of revenue for banks On the other hand, the loan portfolio also contains the greatest risks, affecting the safety and efficiency of commercial banks For decades, to manage loan portfolio risks, bank managers have focused most efforts on making careful loan decisions and post-lending follow-up Currently, even though these control activities are still maintained, the analysis of the credit problems that have occurred to commercial banks in the past1 shows the contents of credit risk management on loan portfolios need to be added Over the past time, tools used for credit risk measurement on loan portfolios mainly focused on indicators related to loan quality, such as overdue debt, subprime debt or fluctuating trend in credit ratings However, commercial banks realized that the above indicators are not enough to help them take actions timely to cope with credit risks, especially when the systemic risks are increasing at the same time Thus, effective loan portfolio risk management still needs to begin with controlling the quality of each loan in the portfolio with important stages, such as loan appraisal or post-lending follow-up In addition, the development of new risk management methods based on technology and multi-dimensional information systems has been a popular trend in commercial banks around the world To date, not many commercial banks have applied the modern loan portfolio risk management methods as above Therefore, the necessity of conducting in-depth theoretical and empirical studies on loan portfolio risk management, especially in the context that the credit risk profile of commercial banks is increasingly complicated and requires more tools to manage In Vietnam, with the integration trend combined with changes in legal regulations For instance, risks were related to the oil and gas, agricultural and real estate loan portfolios of the 1980s in commercial banks around the world towards a safe, efficient and close to the modern international standards of banking management, commercial banks have obtained certain achievements in applying new methods and techniques to credit risk management in general and loan portfolio risk management in particular Nonetheless, for many reasons, the risk management of loan portfolio in Vietnamese commercial banks still has some limitations The consequences of the limitations in loan portfolio risk management are poorlystructured portfolio, credit risks are not identified in time, and high level of nonperforming loan in Vietnamese commercial banks during the period from late 2011 onwards Thus, in Vietnamese commercial banks, the credit risk management on loan portfolios still needs to focus on research in both theory and practice By that reason, in the current practical context, the study of the topic “Credit risk management on loan portfolio in Vietnamese commercial banks” has high practical meaning Research objectives of the thesis 2.1 General research objectives The thesis aims to studying the credit risk management on loan portfolios in Vietnamese commercial banks, then proposes solutions and recommendations for improvement 2.2 Specific research objectives To realize extensive research objectives above, the thesis targets to four specific objectives as follows: Firstly, systematize the theoretical basis of credit risk management on loan portfolio in commercial banks; Secondly, study the facts of credit risk management on loan portfolio in Vietnamese commercial banks and compare performance capacity among groups of Vietnamese commercial banks, thereby giving an assessment on the results and limitations of loan portfolio risk management; Thirdly, simulate the risk measurement of commercial banks' loan portfolios by the two methods, which are Foundation - Internal credit rating based by Basel II (FIRB) and Credit Metrics; Fourthly, propose groups of solutions and recommendations to improve credit risk management on loan portfolio in Vietnamese commercial banks towards international standards Object and study scope of the thesis 3.1 Object of the study The object of the thesis is credit risk management on loan portfolios in commercial banks 3.2 Scope of the study - Scope of the study on space: credit risk management activities on loan portfolios in Vietnamese commercial banks - Scope of the study on time: 2017-2019 phase2 Research methodology of the thesis Three main research methods of the thesis project as follows: Firstly, about survey method To conduct research on the current situation of credit risk management on loan portfolios in Vietnamese commercial banks and make a comparison for two groups of commercial banks with different risk management levels, the author uses survey method Specifically, the survey method was performed on a sample of 16 Vietnamese commercial banks under two groups as follows: In the thesis, surveys on the situation of risk management of the lending portfolio of commercial banks provided results from January 1, 2019 to December 31, 2019, so this study period serves for the descriptive statistics on the secondary data on the status of credit risk and credit risk management on loan portfolio at commercial banks in the sample Group 44% Group 56% Figure 1: Sample structure Source: Author In which:  Group includes 093 banks selected to deploy Basel II according to the State Bank's regulations They are: Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Asia Commercial Bank (ACB), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), Military Commercial Joint Stock Bank (MB), Maritime Commercial Joint Stock Bank (Maritime Bank) and International Commercial Joint Stock Bank (VIB)  Group includes 07 Vietnamese commercial banks that are not in the group of 09 banks above, namely Ho Chi Minh City Housing Development Joint Stock Commercial Bank (HD Bank), An Binh Commercial Joint Stock Bank (AB Bank), Bao Viet Commercial Joint Stock Bank (Bao Viet bank), Public Joint Stock Commercial Bank (PVcomBank), Petrolimex Group Commercial Joint Stock Bank (PG bank), Saigon Commercial Joint Stock Bank (Sacombank) and This group initially consisted of 10 banks selected to pilot Basel II, but as of August 31, 2018, Sacombank suspended the implementation National Citizen Commercial Joint Stock Bank (NCB) The survey consists of 22 raised issues, targeting the respondents who are staffs working in the departments related to credit risk management on loan portfolio in commercial banks, from January 1, 2019 to December 31, 2019 The surveyed subjects responded to questions related to the contents of loan portfolio risk management in their commercial banks Secondly, about simulation method With the aim of measuring the risk of the loan portfolio of Vietnamese commercial banks, the thesis uses two methods outlined in the theory, including the method based on Foundation-Internal Rating Based approach (FIRB) as recommended by Basel II and Credit Metrics method to simulate risk measurement of loan portfolio in commercial banks The simulation is performed on the loan portfolios with assumptions appropriate to each method, thereby giving suggestions for applying the two modern methods of risk measurement above in reality Thirdly, about the expert interviewing method To provide complete solutions to risk management on loan portfolio in Vietnamese commercial banks, the author bases on the opinions of experts during the survey process by using telephone and face to face interviews The expert interviewing issues are integrated in the survey questionnaires implemented in the thesis in questions 5, 10, 11, 14, 16, 18, 20, 21 and 22 New contributions of the thesis Firstly, for theories about credit risk management on loan portfolios of commercial banks in chapter 2, the thesis has over viewed and classified tools and methods in order to indetify, measure and manage credit risk For credit risk identification purpose, there are two methods including (i) credit report and early warning system and (ii) loan portfolios’ past quality evaluation models With credit risk measurement target, the thesis has summed up with for methods, which are: (i) Key risk indicators, (ii) Standardised approach by Basel II, (iii) Internal Rating Based approach by Basel II and (iv) loan portfolios’ quality forecasting models Regarding tools used for credit risk management, there are (i) traditional tools and (ii) modern tools For each of these tools and methods, the author has given details on the bases of classification, drawbacks and conditions to apply in banks These theories give options for Vietnamese commercial banks to choose the most propriate when applying in practice Secondly, there are also in chapter lessons learnt from Japanese commercial banks, Korea Development Bank, Bangkok Bank and US Citibank for credit risk management organizational structure, credit risk indetification, credit risk measurement and using tools for credit risk management on loan portfolios In details, Japanese commercial banks’ operations had proved benefits of centralizational structure in loan porfolio credit risk management, in combination with roles of macroeconomic indicators to identify credit risk In Korea Development Bank, progress of six steps to measure credit risk is considered to be suitable with Basel II standards and with Vietnamese commercial banks’ loan portfolios Besides, Bangkok Bank had sussessfully applied transitional structure in loan portfolio credit risk management, which is congruous with developing banking system like in Vietnam In case of Citibank, seven tools had implemented along with credit risk management process on loan portfolio such as securitization, credit limits, to emphasize role of loan apprasion, credit score, centralizational loan decision, etc These acquirements are the most crucial bases to give solutions for Vietnamese commercial banks in the purpose of improving credit risk management on loan portfolios Thirdly, by doing survey and expert interviews, the author has evaluated facts in credit risk management on loan portfolios of Vietnamese commercial banks These evaluations are based on two groups of banks: Group including nine domestic systemically important banks (D-SIBs), who are experimental pointed to emplement risk management standards by Basel II; and Group which is compounded by seven banks selected randomly among the rest In details, the author has compared between the two groups about the following aspects: credit risk management organizational structure, credit risk indetification, credit risk measurement and using tools for credit risk management on loan portfolios Based on that, Group has showed the better results in doing all of these above aspects However, both groups have drawbacks in applying loan portfolios’ past quality evaluation models to identify credit risk and loan portfolios’ quality forecasting models to measure credit risk The limitations are also revealed in applying modern tools like credit derivatives to managing credit risk on loan portfolios Fourthly, the author has simulated measuring credit risk level of loan portfolios by two methods addressed in chapter 2, including Foundation Internal Rating Based approach by Basel II (FIRB) and Credit Metrics These simulations aim at clarifying data input requirements and steps to follow of each method in order to implement in practice for Vietnamese commercial banks For more detailed, Foundation-Internal Rating Based approach by Basel II requires three steps and input data of PD, EAD, LGD of each loan and default correlation between loans With Credit Metrics, risk level of loan portfolio is measured via eight steps and input data required includes: loan information, discount interest rate by risk level, numbers of customer migrating risk levels, customer impact by sector and sector correlation The suggestions from these simulations could be practical applied in Vietnamese commercial banks Fifthly, the author has given a range of solutions, which are logically based on Basel II standards, theories, lessons from international banks and current status in Vietnamese commercial banks for the target of improving credit risk management on loan portfolios, which should be suitable with new trends and contexts Specially, with the content of measuring credit risk, the thesis has pointed out different solutions and also process to effectuate these solutions for each group of banks Besides, the author has suggested the State Bank of Vietnam to support and supervise commercial banks in managing credit risk on loan portfolios Structure of the thesis Chapter 1: Overview of researches on credit risk management on loan portfolios in commercial banks Chapter 2: Theoretical background for risk management on loan portfolio in commercial banks made at commercial banks on a quarterly basis or on an irregular basis 3.3.2 Regarding risk identification of loan portfolios  Regarding information used to identify the risk of the loan portfolio (i) For the group of signals from the macro-economy and the banking sector Commercial banks have built warning models, set of indicators on macro factors and industry factors as a basis for comparing with the actual situation Besides, a number of large-scale commercial banks also provide statistical reports on the situation of economic sectors (month, quarter, year) with business lines of customers borrowing at banks (ii) For the groups of signals from within the bank's lending portfolio To identify credit risks arising from intrinsic lending portfolios, the Risk Management Division at commercial banks uses expert method to proactively present signs of credit deterioration on loans in the process of operating or processing, receiving warning information reported to by other units, departments in commercial banks  (i) Regarding the methods used to identify loan portfolio risk Credit risk early warning system (EWS) According to the survey results, 100% of commercial banks in group have built up an early warning system for credit risks on their loan portfolios In group 2, only 70% of commercial banks have built this system (ii) Loan portfolios’ past quality evaluation models The survey results show that most commercial banks in both groups have used methods and models to analyze changes in the quality of their loan portfolios in the past and thereby identify the risks that arise from the current loan portfolio Among the used methods, Trend reports are the most commonly used group of methods 3.3.3 Regarding risk measurement of loan portfolios 3.3.3.1 Regarding the credit risk measurement method Firstly, in terms of the credit risk measurement method used, survey data shows that all commercial banks are now using key risk indicators to evaluate the credit risk level on the loan portfolio Moreover, 81% of these commercial banks have applied the 25 standard approach (SA) of Basel II to measure the risk components Only 18.75% of commercial banks have applied the foundation internal rating based approach (FIRB), while the advanced level (AIRB) have not been implemented yet and have not applied this IRB method as a basis for calculating economic capital Secondly, on the application of the measurement results from the above methods in credit risk management to the loan portfolio, the survey results show the application level in Group commercial banks are quite high For group 2, the level of application is only about 50% 3.3.3.2 Regarding the estimation of correlation between loans in the portfolio In fact, risk measurement in Vietnamese commercial banks has not taken into account the diversification efficiency of the lending portfolio and the correlation between loans in the portfolio 3.3.4 Regarding the use of loan portfolio risk management tools 3.3.4.1 Risk management for each loan in the portfolio According to the survey results, commercial banks in the research sample have been able to perform the following methods to manage credit risk on each loan:  Debt classification and credit risk provision  Improve credit quality by well implementing all steps in the credit granting process, especially post-loan supervision  Deploy credit insurance for each loan 3.3.4.2 Diversify loan portfolio Regarding portfolio structure by economic sector, in the past 2018, credit structure has tended to change in the direction of gradually increasing outstanding credit for the non-manufacturing sector (real estate and consumption and securities) Although credit is still mainly focused on production - business, the proportion of total outstanding loans is lower than before In addition, towards the goal of restructuring investment and economic structure, innovation of growth model and diversification of the credit portfolio of the banking system, the State Bank has asked banks to concentrate capital resources for important economic sectors 26 Regarding portfolio structure by loan term, all surveyed commercial banks maintain a higher credit proportion in the medium and long terms 3.3.4.3 Loan sale The facts of the loan sale market in Vietnam shows that loan sale is still very modest However, since the establishment of the Vietnam Asset Management Company (VAMC), loan sale activities in Vietnamese commercial banks have been improved The results of data analysis in the thesis show that although the number of commercial banks is less and the scale of outstanding loans is smaller, the number of special bonds issued by VAMC that the commercial banks in group are holding is much higher than that of commercial banks in group It shows that the amount of bad debt that the group commercial banks are selling to VAMC is larger and the quality of the loan portfolio is still at a higher level of risk 3.3.4.4 Use credit derivatives Commercial banks in the thesis’s sample and the Vietnamese commercial banks in general have not been able to implement the credit derivative tool as a tool to prevent and limit credit risk for their loan portfolios 3.4 Assessment on current situations of risk management on loan portfolio in Vietnamese commercial banks 3.4.1 Obtained results 3.4.1.1 Regarding the organizational structure of risk management on loan portfolios All commercial banks have flexibly used organizational models to manage loan portfolio risk, in which the centralization management method is commonly used 3.4.1.2 Regarding risk identification of loan portfolios Vietnamese commercial banks have built up clear methodologies to identify risks on their loan portfolios, such as using a combination of models to evaluate loan portfolio quality in the past or to build an early risk warning system 3.4.1.3 Regarding risk measurement of loan portfolios Vietnamese commercial banks have initially implemented methods to quantify credit 27 risk on their loan portfolios, although the methods are at different levels 3.4.1.4 Regarding the use of loan portfolio risk management tools  Regarding risk management for each loan in the portfolio With the use of the internal credit rating system, the implementation of the internal credit rating system at the sample banks showed that some positive aspects have been achieved  Regarding diversification of loan portfolio At present, the loan portfolios in Vietnamese commercial banks has fulfilled the requirements of diversification by industry in the direction of increasing the proportion of outstanding loans in production and business sectors, especially in encouraged areas of Government and reduce the share in the non-manufacturing sector, especially in high-risk industries  Regarding the loan sale At present, it can be said that the establishment of VAMC is a success when contributing to the non-performing ratio of the credit institution system significantly decreasing year by year Moreover, the introduction of Resolution No 42/2017/QH14 on piloting bad debt settlement of credit institutions will partly remove difficulties in bad debt trading operations of credit institutions, helping to speed up the bad debt settlement process in the list of commercial banks 3.4.2 Limitations and reasons 3.4.2.1 Regarding the organizational structure of risk management on loan portfolios At present, internal control division is maintained as the third line of defense in the organizational structure under the model of “Three lines of defense ” has not yet achieved optimal results 3.4.2.2 Regarding risk identification of loan portfolio The use of modern methods and models to identify credit risks on a loan portfolio through assessing the quality of the loan portfolio in the past (Trend report, Migration analysis, Vintage analysis, etc.) is limited in commercial banks due to the shortage in 28 technology and human resources Furthermore, commercial banks still suffer limitations when applying the early warning system in identifying credit risks on their loan portfolios 3.4.2.3 Regarding risk measurement of loan portfolio Firstly, in terms of methodology, the survey results show that Vietnamese commercial banks currently have not applied AIRB method as recommended by Basel and group of quantitative models used to measure and forecast credit risks in the future Secondly, on the applicability of the measurement results in the practice of risk management of the loan portfolio, the survey results suggest that the level of application at commercial banks in group is not high 3.4.2.4 Regarding the use of loan portfolio risk management tools  Regarding risk management for each loan in the portfolio The actual application of the internal credit rating system in credit risk management at commercial banks still has limitations in terms of input data for the credit rating system, on evaluation criteria, perception and experience of credit rating practitioners  Regarding the loan sale The reality shows that most of the debts sold by commercial banks are now transactions with VAMC, but this is not a form of purchase and sale perpetually, but the responsibility to handle bad debts still belongs to the bank  Regarding the use of credit derivatives In Vietnam, due to the limitations of technology and expertise while the financial market is still underdeveloped, credit derivative instruments are mostly not known by many stakeholders and are not widely used in business practice of banks 29 CHAPTER 4: SOLUTIONS FOR IMPROVING CREDIT RISK MANAGEMENT ON LOAN PORTFOLIOS IN VIETNAMESE COMMERCIAL BANKS 4.1 Orientation of credit risk management in Vietnamese commercial banks Firstly, regarding the application of Basel standards in credit risk management The implementation of the Circular No 41/2016/TT-NHNN as well as other documents issued by the State Bank in the coming time to guide the implementation of Basel II requires commercial banks to have a strong change in awareness and significantly improve the credit risk management capacity Accordingly, commercial banks have and will organize the implementation of projects to comply with Basel's standards on the credit risk management Secondly, on the application of the achievements of the 4.0 technology revolution in credit risk management With credit risk management in particular and risk management in general at commercial banks, the inevitable trend is the application of management methods that apply modern technology software and use the multidimensional information system as input database In such context, the investment in developing data infrastructure, improving the information technology level and training personnel is an urgent requirement for all Vietnamese commercial banks 4.2 Solutions for improving credit risk management on loan portfolios in Vietnamese commercial banks 4.2.1 Regarding organizational structure of risk management on loan portfolios  Basis for proposing the solution The solutions to perfect this mechanism are based on the theory of credit risk management principles under Basel II as well as the experience of Korea Development Bank, US Citibank and Japanese commercial banks are outlined in chapter  Solution content Firstly, the internal policies and regulations of commercial banks need to clearly and 30 consistently state the functions, tasks, powers and responsibilities of reporting on the results of implementing credit risk management for each department: business units, credit risk management department and internal control department Secondly, all parts of commercial banks themselves need to build their own “culture on risk management” 4.2.2 Regarding risk identification of loan portfolios  Basis for proposing the solution Based on the experiences learned from Japanese commercial banks and US Citibank as pointed out in Chapter 2, along with the limitations outlined in Chapter in applying EWS to identify credit risks of loan portfolios in Vietnamese commercial banks  Solution content Commercial banks need to improve this system in a way that is more diversified than indicators used in early warning of credit risks, especially indicators for corporate customers, and at the same time need to use more indices that can be calculated and updated automatically according to customers' financial situation continuously from time to time 4.2.3 Regarding risk measurement of loan portfolios  Basis for proposing the solution The solutions for measuring the risk of the loan portfolio are given for each group of commercial banks due to the large difference in the level of development of risk quantification methods in these groups of banks, as clarified in chapter The completion of the measurement methods is based on the requirement for principles of credit risk management under Basel II and the theoretical background of each method as presented in chapter 2, combining the experience of Korea Development Bank the legal regulations of the State Bank and the current conditions of commercial banks   Solution content Recommendations for all commercial banks (i) Regarding the use of credit risk measurement methods recommended by Basel 31 Firstly, commercial banks need to build tools to include default correlation between loans in the calculation Secondly, commercial banks need to demonstrate that the internal rating system has complied with the minimum requirements and can be trusted To implement this, a commercial bank needs to take action to improve its internal credit rating system Thirdly, banks that apply the SA or IRB method must regularly compare the actual PD, LGD, EAD ratios with the expected figures at each rating level and need to have proof that the actual PD ratio is in the expected range for that rank The author simulates the performance of risk measurement of loan portfolios in commercial banks according to the FIRB method of Basel II: Risk quantification by this method is done in steps, with assumptions on a loan portfolio of 100 loans with PD by credit grade from the suggestion of S&P (2019), EAD = VND 10 billion, LGD = 0.5 and default coefficient = 0.15 Using software R gives the results of the loss value distribution of the above loan portfolio (C-VaR) with a confidence level of 99.9% over 100 000 iterations as follows: Figure 4.1 Distribute loss value of a loan portfolio by FIRB method Source: Author The above loan portfolio has a maximum loss of VND 80 billion with 99.9% reliability (ii) Regarding the use of KRIs method The KRIs method or other method of measuring portfolio risk in the past is based on 32 historical data on loan portfolio to evaluate Thus, the prerequisite for accurate risk assessment results is the quality and magnitude of the available data sources Moreover, commercial banks should always focus on improving software technology used in evaluation and training of staff to perform this assessment (iii) Regarding the use of loan portfolios’ quality forecasting models In the context of modern banking operations with increasing complexity and risk in credit operations, Vietnamese commercial banks need to apply quantitative models to measure and forecast credit risk on their loan portfolios The author simulates the performance of risk measurement of loan portfolios in commercial banks according to the Credit Metrics method: The risk quantification by this method is conducted through steps, with assumptions on a loan portfolio consisting of loans in four sectors: agriculture, forestry and fishery, industry, construction, trade and services Using the software R, the results of the distribution of loss values on the portfolio over 100 000 iterations are as follows: Figure 4.2 Distribute loss value of a loan portfolio by Credit Metrics method Source: Author The results show that with 100,000 simulations, there are more than 80000 times the above loan portfolio has no credit loss With the frequency of remaining credit losses, the biggest loss that the above portfolio has to face is VND 480 million with a very small frequency and the biggest loss (more than 15000 times) is VND 300 million  Recommendations for commercial banks to pilot the implementation of Basel 33 These commercial banks still need to perform the following additional contents: Firstly, commercial banks need to focus on training the quality of their staff related to credit activities Secondly, the design of the information system affects the output quality of the credit risk assessment model selected by the bank  Recommendations for remaining commercial banks The general recommendations for this group of banks are to step by step approach advanced credit risk measurement models and prepare necessary prerequisites for implementation, as follows: Firstly, the choice of credit risk assessment method depends on the data collection capacity and characteristics of each commercial bank's loan portfolio Secondly, commercial banks can themselves or join in conjunction with the Credit Information Center (CIC) to build credit risk assessment models Thirdly, the information technology system of commercial banks needs to be upgraded and standardized to better support credit activities, progressing to the level of immediate credit risk monitoring of the whole system Fourthly, commercial banks need to reconcile prudent credit risk management coupled with reduced lending and bank profitability 4.2.4 Regarding the use of loan portfolio risk management tools  Basis for proposing the solution Solution on using risk management tools for loan portfolio is given based on limitations of the use of these tools in Vietnamese commercial banks in Chapter 3, based on experiences learned from Korea Development Bank and US Citibank, combined with results from expert interview, and comparing with principles of credit risk management standards recommended by Basel  Solution content  Regarding risk management with each loan in the portfolio Firstly, for the internal credit rating system, it is necessary to improve the quality of input information Moreover, it is necessary to perfect the system of evaluation criteria 34 Secondly, regarding the loan quality management, it is necessary to strengthen management and supervision before and after disbursement and to improve the qualifications of the bank staff  Regarding diversification of loan portfolio An important aspect when diversifying a loan portfolio is to define a credit structure in which the level of risk is commensurate with the ability to manage Moreover, in order to have good control over the risk of portfolio concentration, commercial banks need to seriously and strictly comply with the lending limits given for each customer segment or loan product  Regarding the loan sale To develop loan sale tools in loan portfolio risk management, the development of a market for buying and selling high-risk debts (often referred to as bad debts) should be focused on development  Regarding the use of credit derivatives Firstly, it is necessary to invest in building a modern technology foundation in commercial banks to form and develop derivative operations, that means it requires commercial banks to have certain investment in modernizing information technology Secondly, it is necessary to promote training, improve the quality of human resources and information understanding about derivative products 4.3 4.3.1 Recommendations for the State Bank of Vietnam The recommendations for the SBV to support and promote the application of modern credit risk measurement models in commercial banks Firstly, it is about data and input information According to the author, the first task is to step by step complete the Vietnamese accounting system, commercial banks must obtain financial statements with honest data of enterprises, auditing must become mandatory (at least for large businesses) and must be strictly controlled to avoid fraud Secondly, the State Bank should change the current provisions on provisions against credit risks according to the Circular No 02/2013/TT-NHNN more closely following 35 international standards 4.3.2 The recommendations for the SBV to manage and supervise loan sale activities (i) Complete the legal framework (ii) Complete accounting standards according to international practices creates a corridor for the efficient operation of the bad debt trading market (iii) Intensify information about goods in the bad debt trading market (iv) Develop intermediaries for bad debt trading activities (v) Build a specialized trading floor to improve liquidity for goods in the bad debt trading market (vi) Build a uniform and complete system of bad debt determination bases (vii) Change regulations on payment for bad debt trading (viii) Provide regulation on bad debt handling time of credit institutions (ix) Enhance international cooperation (x) Diversify goods in the bad debt trading market 4.3.3 The recommendations for the SBV as the market manager of credit derivative transactions of Vietnamese commercial banks Firstly, it is crucial to pay attention to the development of unified guiding documents on derivative financial operations and credit derivatives for commercial banks Secondly, to develop the credit derivative market, one of the important premises is to promote the development of the stock market because the stock market is the key channel in derivative transactions Thirdly, complete the financial and accounting regulations related to the transaction of buying and selling credit derivative contracts because these derivative contracts need to be standardized 36 RECAP In the scope and research object of the thesis, the author has performed the following issues: Firstly, the thesis has summarized the theoretical issues of the content of risk management on the lending portfolios in commercial banks, including: risk management organizational structure, risk identification, risk measurement and use of risk management tools Regarding these contents, the thesis has codified into groups of problems, groups of methods and tools to help commercial banks easily compare and use in reality Secondly, the thesis has provided the experiences in implementing risk management on loan portfolio about organizational structure of risk management, risk identification, risk measurement and the use of risk management tools in commercial banks in four countries, namely: Japan, Korea Republic, Thailand and United States Based on the lessons learned, the thesis has proposed a system of solutions to improve risk management on loan portfolios for Vietnamese commercial banks Thirdly, the thesis outlines the current situation of the organizational structure of risk management, risk identification, risk measurement and the use of risk management tools for loan portfolios in Vietnamese commercial banks through the study sample, including 16 commercial banks divided into two groups with differences in credit risk management qualifications and capabilities This is a practical basis for the thesis to evaluate the current situation of risk management of loan portfolio at Vietnamese commercial banks, and at the same time there is a comparison between these two groups and comparison with international standards, thereby helping give an assessment of the results achieved as well as the limitations and shortcomings in risk management on loan portfolio in Vietnamese commercial banks at present To make these assessments, the thesis applies two main methods: survey and in-depth interviews with experts Fourthly, based on the assessment of the above situation, the thesis has proposed a system of recommendations on the content of risk management on loan portfolio for Vietnamese commercial banks and the State Bank of Vietnam Especially, the thesis applies the method of simulation by using the two methods of FIRB and Credit 37 Metrics to simulate risk measurement of the commercial bank’s loan portfolio This helps Vietnamese commercial banks to have a clearer approach and thereby apply more suitable recommendations Besides the achieved results, the thesis still has some limitations as follows: Firstly, the thesis does not fully cover the contents of risk management of loan portfolio Due to the scope of the study, some contents have not been conducted in this thesis, such as: risk management policy, risk appetite, monitoring and evaluation of loan portfolio risk management results Secondly, due to the limitation of collected data and information, the thesis has not fully assessed the situation of risk management on the loan portfolios in all commercial banks in Vietnam The research sample in the thesis includes only 16 selected Vietnamese commercial banks Thirdly, the two methods used by the thesis to simulate portfolio risk measurement, FIRB and Credit Metrics, need to use assumptions, which may not be appropriate in all real credit operations of commercial banks Furthermore, with the limitation of collecting data on commercial banks' loan portfolio, combined with the limitation on software used, this simulation can only be performed on the assumed loan portfolio of commercial banks, with not too high number of loans As a consequence, the calculated results of the loan portfolio risk level in the simulation not mean to reflect the current situation, but here are suggestions on how to apply portfolio risk measurement models for loan portfolio in commercial banks in practice / 38 LIST OF PUBLISHED WORKS RELATED TO THE THESIS Nguyen Bich Ngan (2014) The Vulnerability of Vietnamese Commercial Banks from Merton’s Approach Banking Science & Training Review, Vol 144 May, p43-49 (In Vietnamese) Nguyen Bich Ngan and Nguyen Thanh Tung (2014) Evaluating commercial joint stock banks after M&A Journal of Development Support, Vol 98 October, p3033 Luyen Nguyen, Dung Tran, Ngan Nguyen and Nhan Nguyen (2015) Building on the countercyclical buffer consensus: Asian empirical test SEACEN working paper, Project of “Building on the countercyclical buffer consensus: An empirical test”, p309-338 Nguyen Bich Ngan (2016) Discussion on M&A regulations for Vietnamese credit institutions Banking Review, Vol 20 October, p33-35 Nguyen Bich Ngan (2017) Building credit risk forcasting model to corporate customer for Vietnamese commercial banks Banking Review, Vol 18 September, p34-40 Ngan Bich Nguyen (2017) The Price Discovery Mechanism between Sovereign Bond and Sovereign CDS Market: Studies in Selected Countries Asian Journal of Finance & Accounting, (2), p270-286 Ngan Bich Nguyen (2019) The Vulnerability of Vietnamese Commercial Banks from Merton’s Approach International Journal of Management and Applied Science, 5(11), p42-46 (In English) Nguyen Bich Ngan (2020) Credit risk measurement of loan portfolio in Vietnamese commercial banks Banking Review, Vol 19 October, p11-17 39 ... Principle group about establishing an effective credit procedures Principle group about maintaining appropriate credit management systems, metrics Group of principles on ensuring adequate control systems... View and other models  Model group to approach insurance: Bankruptcy Model and Credit Risk + Model Capuano, C et al (2009) Measure the probability of a group of borrowers defaulting on:  Loss... Compact model group: loan analysis system of KPMG and credit risk management model of Kamakura  Model group to approach VAR: Credit Metrics and other models  Model group according to macro simulation: