VIETNAM NATIONAL UNIVERSITY, HANOI
SCHOOL OF BUSINESS
VAN THU HUONG
LIQUIDITY RISK MANAGEMENT
IN LIEN VIET COMMERCIAL JOINT STOCK BANK
MASTER OF BUSINESS ADMINISTRATION THESIS
Hanoi - 2010
VIETNAM NATIONAL UNIVERSITY, HANOI
SCHOOL OF BUSINESS
VAN THU HUONG
LIQUIDITY RISK MANAGEMENT
IN LIEN VIET COMMERCIAL JOINT STOCK BANK
Major: Business Administration
Code: 60 34 05
MASTER OF BUSINESS ADMINISTRATION THESIS
Supervisors:
1. Dr. Chu Thanh
2. MBA Ha Nguyen
Hanoi - 2010
TABLE OF CONTENTS
ACKNOWLEDGEMENTS......................................................................................i
ABSTRACT............................................................................................................ii
TÓM TẮT.............................................................................................................. iv
LIST OF ABBREVIATIONS.................................................................................. x
LIST OF TABLES .................................................................................................xi
LIST OF FIGURES...............................................................................................xii
INTRODUCTION................................................................................................... 1
CHAPTER I: LITERATURE REVIEW .................................................................. 5
1.1.
Commercial bank ......................................................................................5
1.1.1 Concepts................................................................................................ 5
1.1.2 Products & services provided by commercial banks .............................. 6
1.1.3 Roles of commercial bank in economics ................................................6
1.2.
Risk management in Commercial Bank.....................................................7
1.2.1. Risk in commercial bank .......................................................................7
1.2.2. Main risks in Commercial Bank ............................................................ 8
1.2.3. Risk Management in Commercial Bank.................................................8
1.3.
Liquidity Risk Management in Commercial Bank................................... 10
1.3.1. Defining liquidity risk.......................................................................... 10
1.3.2. Basel and Basel II requirements........................................................... 12
1.3.3. International Framework for Liquidity Risk Management in Commercial
Bank 16
1.3.3.1. Liquidity risk tolerance .................................................................... 18
vi
1.3.3.2. Strategy & Policy............................................................................. 18
1.3.3.3. The responsibilities to manage liquidity risk .................................... 19
1.3.3.4. Liquidity Risk Management Process ................................................ 21
1.3.3.5. Contingency Planning ...................................................................... 25
1.3.3.6. Internal Audit................................................................................... 27
1.4.
Liquidity risk in Vietnam Commercial bank system ................................ 27
1.4.1. Some typical events of liquidly risk in Viet Nam before year 2006...... 27
1.4.2. From the beginning of year 2006 to the end of year 2007: ................... 28
1.4.3. From the beginning of year 2008 – the end of year 2008 ..................... 29
1.4.4. From the beginning of year 2009 to the ending of year 2009 ............... 30
1.4.5. The first six months of year 2010......................................................... 31
1.4.6. Summarized main reasons for liquidity crunch .................................... 32
1.5.
State Bank of Vietnam regulations .......................................................... 33
1.6.
Practices for liquidity risk management................................................... 37
1.6.1.
The Hongkong and Shanghai Bank Corporation .................................. 37
1.6.2.
Asia Commercial Bank........................................................................ 38
CHAPTER 2.
2.1.
LIQUIDITY RISK MANAGEMENT IN LIENVIETBANK .... 41
Overview on LienVietBank..................................................................... 41
2.1.1. Introduction ......................................................................................... 41
2.1.2. Business Results .................................................................................. 44
2.1.3. Organization structure ......................................................................... 44
2.2.
Liquidity risk in LienVietBank................................................................ 45
2.2.1. SBV’s regulations on liquidity ratios in the activities of credit institution
vii
46
2.2.2. Supplies of Liquidity ........................................................................... 47
2.2.2.1. Liquid Assets................................................................................ 48
2.2.2.2. Loans repayment .......................................................................... 53
2.2.2.3. Total mobilized funds and chartered capital.................................. 55
2.2.3. Measurement of Liquidity risk via Gap Analysis ................................. 59
2.2.3.1. LienVietBank’s Liquidity Gap report in VND (see table 2-11)..... 60
2.2.3.2. LienVietBank’s Liquidity Gap report in USD (see table 2-12)...... 63
2.2.4. Assessment on current status of liquidity risk ...................................... 65
2.3.
General situation of risk management at LienVietBank........................... 67
2.3.1. From establishment to end 2008 .......................................................... 67
2.3.2. For the year of 2009............................................................................. 68
2.3.3. From the beginning of 2010 to now ..................................................... 69
2.4.
Liquidity risk management in LienVietBank........................................... 69
2.4.1. Strategy and Policy .............................................................................. 69
2.4.2. The responsibilities to manage liquidity risk........................................ 71
2.4.3. Process of liquidity risk management................................................... 74
2.4.4. Internal Audit ...................................................................................... 75
2.4.5. Contingency Plan ................................................................................ 75
2.5.
Assessment on liquidity risk management in LienVietBank .................... 76
2.5.1. Achievements ...................................................................................... 77
2.5.2. Drawbacks on the current liquidity risk management in LienVietBank 78
2.5.2.1. Strategy and policy ....................................................................... 78
viii
2.5.2.2. Organization structure .................................................................. 78
2.5.2.3. Process of liquidity risk management and contingency plan ......... 79
2.5.2.4. Management information system.................................................. 79
2.5.2.5. Human resource............................................................................ 80
CHAPTER 3 RECOMMENDATIONS AND SOLUTIONS ................................. 82
3.1
Some petitions for LienVietBank ............................................................ 82
3.1.1 Building a culture of risk management in LienVietBank...................... 82
3.1.2 Building Liquidity risk strategy and policy ......................................... 84
3.1.3 Improving organizational structure ...................................................... 87
3.1.4 Building process of liquidity risk management .................................... 90
3.1.5 Building contingency plan ................................................................... 97
3.1.6 Improving management information system ........................................ 99
3.1.7 Improving human resources............................................................... 100
3.1.8 Action planning ................................................................................. 102
3.2. Some petitions for SBV............................................................................. 107
3.3. Some petitions for Government ................................................................. 108
Conclusion .......................................................................................................... 109
REFERENCE...................................................................................................... 110
Appendix 1.......................................................................................................... 112
Appendix 2.......................................................................................................... 113
Appendix 3.......................................................................................................... 114
Appendix 4.......................................................................................................... 115
ix
LIST OF ABBREVIATIONS
ACB
Asia Commercial Bank
ALCO
Asset and Liability Committee
BOD
Board of Directors
BOM
Board of Management
CAR
Capital Equity Ratio
HR
Human Resource
LVB
LienViet Commercial Joint Stock bank
NPLs
Non performing loans
SBV
State Bank of Viet Nam
Sacombank
Sai Gon Thuong Tin bank
TCB
Vietnam Technological and Commercial Joint stock bank
VCB
The Bank for Foreign Trade of Vietnam
x
LIST OF TABLES
Table 1-1: Products & services provided by commercial banks ............................... 6
Table 1-2: Summarized the principles of Basel 2................................................... 14
Table 1-3: International Framework for Liquidity Risk Management in Commercial
Bank...................................................................................................................... 17
Table 1-4: The differences between Decision No.457 and Circular 15 & 13 .......... 36
Table 2-1: Business Results - LienVietBank.......................................................... 44
Table 2-2: Comparison of the liquidity ratios......................................................... 46
Table 2-3: The ratio of liquid assets to total assets ................................................. 49
Table 2-4: Comparison of the ratio of liquid assets to total assets .......................... 50
Table 2-5: The average ratio of the component to liquid assets.............................. 51
Table 2-6: Comparison of the portion of the items out of liquid assets................... 52
Table 2-7: Some indicators of loans quality ........................................................... 54
Table 2-8: Comparison of loans quality by NPL ratio ............................................ 55
Table 2-9: Comparison of LDR ............................................................................. 55
Table 2-10: Mobilized funds from corporate and individuals of LienVietBank...... 57
Table 2-11: LienVietBank’s Liquidity Gap report in VND .................................... 62
Table 2-12: LienVietBank’s Liquidity Gap report in USD..................................... 64
Table 2-13: Summarize assessment on current status of liquidity risk in
LienVietBank ........................................................................................................ 65
Table 3-1: Recommendation for Process of liquidity risk management (content)... 91
Table 3-2: Recommendation for Contingency plan sample .................................... 98
Table 3-3: Recommendation for Action planning ................................................ 103
xi
LIST OF FIGURES
Figure 1- 1: Three pillars of Basel II...................................................................... 13
Figure 2-1: Comparison of the ratio of liquid assets to total assets......................... 50
Figure 2-2: Total mobilized funds of LVB............................................................. 56
Figure 2-3: The number of accounts of incoming customer deposits...................... 58
Figure 2-4: Rating liquidity risk management in LVB ........................................... 77
Figure 3-1: Overview on chapter 3………………………………………………... 81
Figure 3-2: Recommendation for Organization structure ....................................... 87
Figure 3-2: Recommendation for Process of liquidity risk management (procedures)
.............................................................................................................................. 95
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INTRODUCTION
1
Necessity of the thesis
The nature of the bank is making a profit based on business risk. In banking
activities many types of risk exist (credit risk, liquidity risk, market risk, etc.). In
Vietnam, the banking activities are often associated with credit risk. However,
liquidity risk, the type of risks that can immediately make a bank collapse is less
focused, because if the banking activities took place on a normal schedule, the
risk was not disclosed. Only when a certain event happens to have a negative
impact on the bank, then the liquidity risk is exposed, in the worst case, banks
have no liquidity, leading to bankruptcy, and affecting the entire banking
system.
In Vietnam, liquidity risk can be a problem just say "old problem" was just a
matter of "new problem". Calling it "an old problem" is because any bank
manager knows about this kind of risk, understands the importance of it and they
are also managing liquidity risk based on experience and traditional methods.
And calling it "a new problem" is because not many banks in Vietnam really
understand it and find ways to reach new approaches to liquidity risk
management by international standards. Only after the events on the liquidity
risk from 2006 through to now did banks begin to explore and consciously
implement the management of liquidity risk, according to a scientific and more
systematic method. The starting point of that process must be derived from the
banks which are fully equipped with theoretical knowledge about liquidity risk
management.
LienVietBank was established in April 2008, and in more than 2 years the bank
has gained outstanding achievements in business results, but besides that, the
issues of risk management are all complex. The organizational structure is not
stable, risk management personnel frequently change, the bank only cares about
1
credit risk management and pays no attention to risk management activities,
particularly the management liquidity risk.
And if there is a crisis similar to the liquidity crisis in 2008, the bank will face
the enormous difficulty. It is the reason why I decided to choose the topic
“Liquidity risk management in Lien Viet Commercial Joint Stock Bank” for my
thesis.
2
Research Objective
The aim of the research is to analyze and assess the current status of liquidity
risk management in LienVietBank and to propose appropriate recommendations
to enhance the efficiency in liquidity risk management in LienVietBank. The
thesis therefore aims to achieve the following objectives:
Systemize the basic theoretical problem about liquidity risk and liquidity risk
management in commercial banking.
Identifying and assess current situations of liquidity risk and liquidity risk
management in LienVietBank.
Propose recommendations and solutions to enhance the efficiency in
liquidity risk management in LienVietBank.
3
Research Scope
For the purpose and requirement of an MBA graduate thesis, the thesis only
focuses on liquidity risk and liquidity risk management in Lien Viet Commercial
Joint stock bank.
4
Information sources
Statistic data gathered at LienVietBank (financial statements, official
releases of LienVietBank).
Data from other sources such as other banks, books, internet, related journals
2
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and periodic, science reviews.
Information gathered from direct observation as a person directly involved in
activities related.
5
Research Methodology
The research methodology of the thesis is the combination of both qualitative
and quantitative to analyze data and information, make comparisons, evaluations
and conclusions on current situation of liquidity risk management in
LienVietBank.
6
Limitation
The assessment focuses on the liquidity risk management in LienVietBank, due
to time constraint, limited analysis tools and the ability to approach data sources
the research can not be analyzed fully and deeply all aspects of the problem.
7
Expected result
Thesis systematizes the basic knowledge of liquidity risk management in
commercial bank, to apply this knowledge to assess liquidity risk and liquidity
risk management in LienVietBank. From there thesis contributes practical ideas
to
LienVietBank
to
improve
liquidity
risk
management,
enhance
competitiveness of LienVietBank in the market.
8
Thesis structure
TOPIC: “Liquidity risk management in LienViet Commercial Joint stock bank
(LienVietBank)”
Introduction
Chapter 1: Literature Review
Chapter 2: Liquidity risk management in LienVietBank
3
Chapter 3: Recommendations and Solutions
Conclusion
References
4
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CHAPTER I: LITERATURE REVIEW
This chapter aims to answer the research questions about liquidity risk. Firstly,
definitions related to commercial bank, risk management in commercial bank.
Secondly and finally, definitions related to liquidity risk and liquidity risk
management in commercial bank, expressing by Basel II and international
framework for liquidity risk management.
1.1.
1.1.1
Commercial bank
Concepts
There is still much confusion about what exactly a commercial bank is. And
many definitions have been given by organizations. "Commercial banks" can be
defined based on: (1) Its function in the economy; (2) The services it offers to
customers or (3) based on legal institutions that exist:
“A financial institution that accepts demand deposits and makes loans and
provides other services for the public”1.
“A full-service institution that offers customers deposit, payment and credit
services, in addition to other financial services”2.
“A financial intermediary which collects credit from lenders in the form of
deposits and lends in the form of loans”.3
Finally, there is a definition “commercial bank” still used by many nations
today: The bank that sells deposits and makes loan to businesses and
individual4.
1
Source: wordnetweb.princeton.edu/per1/webwn
2
Source: arcuclesbase.com
3
Source: http://www.investorglossary.com/commercial-bank.htm
4
Source: S.Rose, Peter and C.Hudgins, Sylvia, (2008), Bank management & Financial Services, page 6
5
1.1.2
Products & services provided by commercial banks
Commercial banks offer many types of products and services which can be
summarized as below:
Table 1-1: Products & services provided by commercial banks1
Products & Services
Content
Represent liabilities of the bank, include checking and
Liability products
savings accounts, certificates of deposit and other
types of deposit products
Represent the primary assets of the banks, these
Asset Products
products normally take the form of personal and
business loans, mortgages, auto loans and credit cards
Include the maintenance and expansion of 24-hour
ATM networks, wire transfers and banking websites
Electronic banking
that allow consumers and business to obtain account
information, open new accounts, order checks, transfer
funds between accounts and make bill payments
Include investment advisory services, corporate
Other Services
finance consulting, custodial services for estates and
trusts, safekeeping of securities and other valuable
items, and money transfer services
1.1.3
Roles of commercial bank in economics
Commercial banks play an important role in economic development. Economic
development involves investment in various sectors of economy. Commercial
banks collect savings from the people and mobilize saving for investment in
industrial project or making loans to individuals. The investors borrow from
banks to finance the projects. Special funds are provided to the investors for the
1
Source: John B.King, 2010, Ehow contributor journal
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completion of projects. Commercial banks also represent a vital link in the
transmission of government’s economic policies to the rest of the economy,
when bank credit is scare and expensive, spending in the economy tends to slow
and unemployment usually increase. Or if interest rates are very high, the cost of
bank credit will be high and this could be inflationary.
1.2.
1.2.1.
Risk management in Commercial Bank
Risk in commercial bank1
Risk in a banking organization is possibility that the outcome of an action or
event could bring up adverse impacts. Such outcomes could either result in a
direct loss of earnings/capital or may result in imposition of constraints on
bank’s ability to meet its business objectives. Such constraints pose a risk as
these could hinder a bank's ability to conduct its ongoing business or to take
benefit of opportunities to enhance its business.
Banks often distinguish between expected and unexpected losses. Expected
losses are those that the bank knows with reasonable certainty will occur (e.g.,
the expected default rate of corporate loan portfolio or credit card portfolio) and
are typically reserved for in some manner. Unexpected losses are those
associated with unforeseen events (e.g. losses experienced by banks in the
aftermath of nuclear tests, Losses due to a sudden down turn in economy or
falling interest rates). Banks rely on their capital as a buffer to absorb such
losses.
Risks are usually defined by the adverse impact on profitability of several
distinct sources of uncertainty. While the types and degree of risks an
organization may be exposed to depend upon a number of factors such as its
size, complexity business activities, volume etc, it is believed that generally the
1
State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs, page
1
7
banks
face
Credit,
Market,
Liquidity,
Operational,
Compliance/Legal/Regulatory and reputation risks. Before overarching these
risk categories, given below are some basics about risk Management and some
guiding principles to manage risks in banking organization.
1.2.2.
Main risks in Commercial Bank
Banks face a number of risks in order to conduct their business, and there have
been four main risks faced by commercial banks include:
Credit risk arises from the potential that an obligor is either unwilling to perform
on an obligation or its ability to perform such obligation is impaired resulting in
economic loss to the bank.1
Market Risk: It is the risk that the value of on and off-balance sheet positions of
a financial institution will be adversely affected by movements in market rates
or prices such as interest rates, foreign exchange rates, equity prices, credit
spreads and/or commodity prices resulting in a loss to earnings and capital2.
Liquidity Risk: Liquidity is the ability of a bank to fund increases in assets and
meet obligations as they come due, without incurring unacceptable losses. 3
Operational Risk: the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. The definition includes
legal risk but excludes strategic and reputational risk.4
1.2.3.
Risk Management in Commercial Bank1
1
State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs, page 5
2
State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs, page 17
3
Source: Basel Committee on Banking Supervision, (2008), Principles for sound liquidity risk management
and supervision, page 1
4
Source: Bank for International Settlements, Sound Practices for the Management and Supervision of
Operational Risk, ,page 2
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“Banks are in the Business of Managing Risk, Pure and Simple, that is the
Business of Banking” (Walter Wriston, Chairman an CEO Citicorp 19701984)”
The acceptance and management of financial risk is inherent to the business of
banking and banks’ roles as financial intermediaries. Risk management as
commonly perceived does not mean minimizing risk; rather the goal of risk
management is to optimize risk-reward trade-off. Bank accepts risks that are
uniquely part of the array of bank’s services.
Risk management activities broadly take place simultaneously at following
different hierarchy levels.
Strategic level: It encompasses risk management functions performed by senior
management and board of director. For instance definition of risks, ascertaining
institutions risk appetite, formulating strategy and policies for managing risks
and establish adequate systems and controls to ensure that overall risk remain
within acceptable level and the reward compensate for the risk taken.
Macro Level: It encompasses risk management within a business area or across
business lines. Generally the risk management activities performed by middle
management or units devoted to risk reviews fall into this category.
Micro Level: It involves ‘On-the-line’ risk management where risks are actually
created. This is the risk management activities performed by individuals who
take risk on organization’s behalf such as front office and loan origination
functions. The risk management in those areas is confined to following
operational procedures and guidelines set by management.
What Benefits of risk management in Banking?
Protect the bank from unexpected failures, loss, damage
1
Source: State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs, page
3-4
9
Anticipate adverse changes
Be less vulnerable from negative environmental changes
Increase competitive advantages
Be able to gain the expertise to price risks and take opportunities.
1.3.
Liquidity Risk Management in Commercial Bank
1.3.1. Defining liquidity risk
"Liquidity" refers to a financial institution’s capacity to meet its current and
anticipated liquidity obligations as they come due, without incurring
considerable losses.1
The Demand for and Supply of Liquidity2
The Supply of Liquidity
Incoming customer deposits
Revenues from the sale of nondeposit services
Customer Loan repayments
Borrowing from the money market
Selling assets
Capital and Reserve
The Demand for Liquidity
Customer deposit withdrawals
Credit requests from quality loan customers
1
Source : Autorite Des Marches Financiers, (2009), Liquidity risk management guideline, page 7
2
Source: S.Rose, Peter and C.Hudgins, Sylvia, (2008), Bank management &
Chapter 11: Liquidity and Reserve Management: Strategies and Policies
10
Financial Services,
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Repayment of nondeposit borrowing
Operating expenses and payment of tax
Payment of dividends by cash
Net liquidity position
The following sources of liquidity and supply come together to determine each
bank’s net liquidity position at any moment of time:
Net liquidity position = Supplies of liquidity – Demand of liquidity
Liquidity Shortage: Net liquidity position > 0 (greater than zero)
Implications of liquidity deficit:
Offering higher rate of profit to deposits
Shortage of financial resources to invest against commitments
Loss of competitiveness
Liquidity surplus: Net liquidity position <0 (Smaller than zero)
Implications of liquidity surplus:
Underutilization of financial resources,
Lower income and higher cost,
Loss of competitiveness
Liquidity risk1
Liquidity risk results from a financial institution’s difficulty or inability to honor
its liquidity commitments in a timely manner at a reasonable cost. Liquidity risk
can also extend to a financial institution’s inability to take advantage of business
opportunities and sustain the growth forecast in its strategic plan (strategic risk)
due to a lack of liquidity or difficulty in obtaining funding at a reasonable cost.
1
Source : Autorite Des Marches Financiers, (2009), Liquidity risk management guideline, page 7
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