NGUYEN BAO HUYEN LIQUIDITY RISK AT THE VIETNAMESE COMMERCIAL BANKS

Transcription

1 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY NGUYEN BAO HUYEN LIQUIDITY RISK AT THE VIETNAMESE COMMERCIAL BANKS MAJOR: FIANANCE BANKING CODE: SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS HANOI

2 THE DISSERTATION WAS COMPLETED AT BANKING ACADEMY OF VIETNAM Academic Advisor: 1. Assoc. Prof. Dr. Le Van Luyen 2. Dr. Pham Thi Hoa Reviewer 1: Reviewer 2: Reviewer 3: The dissertation will be defended at University-level Council of Dissertation Assessment at Banking Academy of Vietnam at (hour)..date..month year 2016 The dissertation is available at: - Library of Banking Academy of Viet Nam - National Library

3 1 INTRODUCTION 1. Rationale of the topic For business activities of a bank, three goals of safety, profitability and liquidity have a close relationship with each other which are set by manager. In which liquidity issue is very important to viability and development of a bank. From bank s perspective, liquidity can be understood as the ability to meet immediate needs of withdrawing cash of customers at any given time at the lowest cost. In other words, whenever customers want to withdraw money, the bank must satisfy their needs immediately. This makes bank managers have methods to measure, manage and plan usage of funds in order to ensure profitability of assets and meet needs of withdrawing cash of customers at minimum cost. It can be said that liquidity is a very sensitive issue in banking business activities. If a bank loses liquidity, it will quickly go to bankruptcy, then affecting stability of a banking system. In Vietnam, occurrence of a number of liquidity risk events, typically ACB in 2003 or Southern Bank in 2005, liquidity strain of the banking system in 2008 together with the fluctuation of the financial market from the second half of 2010 until now have demonstrated the importance of liquidity risk management of commercial banks. Strengthening awareness, innovation and development of risk management system in general and liquidity risk in particular has become extremely urgent. In that context, researching liquidity risk management to minimize risks for commercial banks is important topic that is meaningful in terms of both theory and practice. Since late 2010,

4 2 Basel Committee on Banking Supervision has issued standardized principles to manage risks of banks including liquidity risk. In addition to this, tools and approaches to manage liquidity risk have been improved in a positive way However, due to a fact that there have been many difficulties and limited experience, so research on application of current international liquidity risk standards for operations of the Vietnamese commercial banks still needs to be conducted for further improvement. Based on above theoretical and practical issues, the author decides to choose a topic of Liquidity risk at the Vietnamese commercial banks for my doctoral dissertation in economics. 2. Literature review a. International studies Internationally, a number of researchers have carried out their research on liquidity risk and liquidity risk management, for instance: - Guglielmo Michael R. (2007) Managing Liquidity Risk - Gianfranco A. Vento (2009) Bank Liquidity Risk Management and Supervision: Which Lessons from Recent Market Turmoil? - Rudolf Duttweiler (2010) Managing Liquidity in Banks: A Top down Approach - Meile Jasiene, Jonas Martinavicius, Filomena Jaseviciene, Grazina Krivkiene (2012) Bank Liquidity Risk: Analysis and Estimates

5 3 b. Domestic studies - Solutions to manage interest rate risk at Agrinbank, Doctoral dissertation in economics, Do Thi Kim Hao (2005) - Strengthening capacity of liquidity risk management at the Vietnamese commercial banks, Ministry-Level Research, To Ngoc Hung (2007) - Managing interest rate risk in business activities of the Vietnamese commercial banks, Doctoral dissertation in economics, Ta Ngoc Son (2011) - Market risk management at Vietinbank, Doctoral dissertation in economics, Hoang Xuan Phong (2014) - Solutions to enhance quality of asset and liability management at Agribank, Doctoral dissertation in economics, Trinh Hong Hanh (2015) 3. Objectives of the dissertation - Clarifying further the theoretical issues of liquidity risk, approach to identify, measure and control liquidity risk; tools to support liquidity risk management of commercial banks. - Analyzing and assessing current state of liquidity risk and liquidity risk management at the Vietnamese commercial banks, then pointing out causes of liquidity risk for the Vietnamese banks. - Proposing solutions to prevent, limit liquidity risk and enhance capacity of liquidity risk management at the Vietnamese commercial banks in line with international practices. 4. Subjects and scope of the research - Subjects of the dissertation: The study focuses on theoretical

6 4 and practical issues of liquidity risk and liquidity risk management of commercial banks. Besides, the dissertation refers to documents of liquidity risk and liquidity risk management of certain banks such as Argentinian, Russian banks and Northern Rock. - Scope of the dissertation: In order to study and assess liquidity risk at the Vietnamese commercial bank, the dissertation focuses on the period of based on annual reports of the State Bank of Vietnam and the Vietnamese commercial banks. 5. Research methodology - The method of dialectical materialism and historical materialism: Researching construction and development of liquidity risk management approaches at the Vietnamese commercial banks affected by objective factors. - Logical method: Studying intra-developments influenced by internal factors including major factors. - Statistical methods and synthesis: The dissertation uses data of the Vietnamese banking system in the period Other research methods: Comparison, induction and deduction. 6. Contributions of the dissertation The dissertation systematizes and clarifies theory of liquidity risk and liquidity risk management in the context of deeper international economic integration and increased competitive pressure in business activities of commercial banks. Moreover, the study gives basic contents of liquidity risk of a commercial bank. Indeed, the dissertation provides a method to construct a standardized

7 5 system of liquidity risk at a commercial bank in terms of model, policy and liquidity risk management process. The research states experience of liquidity risk management of certain foreign commercial banks, then draws lessons for Vietnam. Based on surveys and real data, the dissertation analyzes current state of liquidity risk and liquidity risk management at the Vietnamese commercial banks, then indicates causes of liquidity risk for the commercial banks as well as factors affecting ability of liquidity management of the commercial banks. Based on this, the study proposes solutions to prevent, limit liquidity risk and enhance capacity of liquidity risk management at the Vietnamese commercial banks in line with international practices. The dissertation proposes suitable solutions for current situations of the banking system in terms of constructing risk management framework according to international standards; improving liquidity risk management policy, model, process, approach and tools to manage liquidity risk; increasing predictability and enhancing capacity of liquidity risk management for the Vietnamese banking system. 7. Structure of the dissertation Besides introduction, conclusion and references, the dissertation includes 3 chapters Chapter 1: Theory of liquidity risk of commercial banks Chapter 2: Current state of liquidity risk of the Vietnamese commercial banks Chapter 3: Solutions to prevent liquidity risk and enhance capacity of liquidity management at the Vietnam commercial banks

8 6 CHAPTER 1. THEORY OF LIQUIDITY RISK OF COMMERCIAL BANKS 1.1. Liquidity of a commercial bank Definition of liquidity of a commercial bank Liquidity represents the ability of a bank to meet all of its payment obligations as they come due (to the maximum) and in regulated currency. Because these obligations are paid in cash, liquidity only relates to cash flows. Failure to fulfil payment obligations will results in insufficient liquidity. [19, tr.23] Supply, demand of liquidity and net liquidity position Supply of liquidity Demand of liquidity Net liquidity position 1.2. LIQUIDITY RISK AND REASONS OF LIQUIDITY RISKS Definition of liquidity risk Liquidity risk is a type of risk when a bank is unable to supply sufficient money for immediate demand for liquidity, or provides sufficient money but with high cost. Put it other words, this kind of risk arises when the bank does not has the ability to pay its obligations because it does not convert its assets to cash timely or cannot borrow money to satisfy requirements of payment contracts [1] Reasons of liquidity risk Subjective reasons - Maturity mismatching of assets and liabilities

9 7 - Asset structure imbalance - Unreasonable customer structure - Commercial banks have loose lending policy - Commercial banks are not able to predict demand for withdrawal of money or/and payment obligations - Limited financial capacity - Trading multiple currencies induces liquidity risk and requirements to finance each currency - Customers doubt the credibility of a bank Objective reasons - Financial assets are sensitive to fluctuations of interest rate - Monetary policy of the central bank - Legal framework on safe operations of credit institutions - Business cycles of customers - Special property of currency trading industry - Economic or financial crisis - Rumors LIQUIDTY RISK MANAGEMENT AT COMMERCIAL BANKS Definition and the necessity of liquidity risk management business activities of commercial banks Definition Liquidity risk management is a process to identify, measure, control and finance risks when a bank cannot meet timely and sufficiently liquidity needs for customers [9, tr.326].

10 The necessity of liquidity risk management business activities of commercial banks Best practices on liquidity risk management of commercial banks Building structure for liquidity management Measuring and monitoring net funding requirement Managing ability to access market Preventive plan Managing liquidity in foreign currency Internal control of liquidity risk management Roles of publicizing information in enhancement of liquidity Roes of supervisory authorities Contents of liquidity risk management of commercial banks Organizing liquidity risk management Liquidity risk management belongs to risk management system and is one of key activities of asset liability management (ALM) at a commercial bank. Therefore, liquidity risk management should be taken by the following bodies: Risk management committee (RMC) Asset liability management system: Relevant units in the system includes: Asset liability committee (ALCO) ALM (ALM unit/desk) Treasury department

11 9 Internal audit function Market signals to identify liquidity risk - The confidence of the public - The fluctuations of a bank s stock price - Applying interest rare higher than that of market - Loss from assets - Impaired ability to meet needs of loans - Borrowing from the central bank regularly Measurement of liquidity risk Capital structure approach Capital and capital usage approach Liquidity indicator approach Maturity ladder approach Control of liquidity position Prevention of liquidity risk (1) Traditional liquidity risk management approach (2) Modern liquidity risk management approach (3) Mixed liquidity risk management approach Preventive plan Factors affecting the ability of liquidity risk management Subjective factors Objective factors 1.4. EXPERIENCE OF LIQUIDITY RISK MANAGEMENT ON THE WORLD AND LESSONS FOR VIETNAM

12 Liquidity risk events of certain commercial banks on the world Liquidity risk of Argentinian banks in Liquidity risk of Russian banks in The collapse of Northern Rock in Experience of liquidity risk management of some commercial banks on the world Liquidity risk management of HSBC Liquidity risk management of SMBC, Japan Lessons for Vietnam s commercial banks First, commercial banks need to measure, analyze and calculate reasonable amount of liquidity reserve in order to avoid cash surplus as well as ensure liquidity position. Liquidity condition is usually guaranteed by not only high quality short-term lending but also investments in valuable papers converting into cash in market easily. Second, commercial banks need to be proactive to identify and prevent liquidity risk. Liquidity risk management committee needs to have measures to coordinate liability liquidity management and asset liquidity management to take advantage of cash in hand and guarantee capital mobilization in case of high demand for liquidity. Commercial banks need to be aware that any risk can affect safety of a bank, especially credit risk. Credit and liquidity risk have a close correlation with each other, with high credit growth in the past years, commercial banks have to pay attention to liquidity risk.

13 11 Third, lending activity must be controlled effectively by specific standards, avoiding lending provision with loose loan appraisal process. Next, following management experience of SMBC, commercial banks need to implement risk management strategy according to CAMELS model, then the banks can coordinate elements to manage liquidity in the most effective way. Then, commercial banks have to improve macroeconomics forecasts in order to deal with the volatility of the financial market. Sudden changes of the market may heavily influence business activities of a bank. Sixth, in order to mitigate impacts of liquidity risk, commercial banks need to have measures to finance liquidity risk, such as buying deposit insurance, improving liquidity risk management in entire system to identify, measure and analyze extent of liquidity risk. Seventh, building a soundness banking system, paying attention to quality rather than quantity. Commercial banks need to have large amount of equity in order to prevent easily mass cash withdrawal of customers. Last but not least, a commercial bank need have transparent risk management activities to avoid rumors that affect credibility of the bank, thus leading to a public confidence crisis CHAPTER 2. CURRENT STATE OF LIQUIDITY RISK OF THE VIETNAMESE COMMERCIAL BANKS

14 AN OVERVIEW OF THE VIETNAMES BANKING SYSTERM An overall picture of Vietnam s banking system As of 31/6/2015, there are 95 banks operating in Vietnam including 4 state-owned commercial banks, 33 joint stock commercial banks, 4 joint venture commercial banks, 5 wholly foreign-owned commercial banks and 49 branches of foreign banks (Table 2.1, the dissertation) Business activities of the Vietnamese commercial banks 2.2. CURRENT STATE OF LIQUIDTY RISK AND LIQUIDITY RISK MANAGEMENT OF THE VIETNAMESE COMMERCIAL BANKS Current state of liquidity risk of the Vietnamese commercial banks Liquidity risk of certain Vietnamese commercial banks Potential liquidity risk of Vietnam s commercial banks and solutions of State Bank of Vietnam Current state of liquidity risk management of Vietnam s commercial banks Legal framework for liquidity risk management Organization structure of liquidity risk management Measurement of liquidity risk (1) Capital Adequacy Ratio (CAR) (2) Cash position indicator

15 13 Table 2.11: Cash position indicator of the commercial banks (%) Agribank BIDV CTG VCB STB SCB MB ACB TCB SHB EIB HDB NVB Oceanbank PGB ABB VIB OCB DongABank KienLongBank VPBank

16 14 MDB MHB SGB (3) Liquidity stock indicator Table 2.12: Liquidity stock indicator of the commercial banks (%) Agribank BIDV CTG VCB STB SCB MB ACB TCB SHB EIB HDB NVB Oceanbank PGB ABB VIB

17 15 OCB BacABank DongABank KienLongBank VPBank MDB MHB SGB (4) Lending capacity indicator Table 2.13: Lending capacity indicator of the commercial banks (%) Agribank BIDV CTG VCB STB SCB MB ACB TCB SHB EIB HDB

18 16 NVB Oceanbank PGB ABB VIB OCB BacABank DongABank KienLongBank VPBank MDB MHB SGB (5) Loan to deposit ratio Table 2.14: Loan to deposit ratio LDR (%) Agribank BIDV CTG VCB STB SCB MB

19 17 ACB TCB SHB EIB HDB NVB Oceanbank PGB ABB VIB OCB BacABank DongABank KienLongBank VPBank MDB MHB SGB (5) Net position of the commercial banks in interbank market Table 2.15: Net position of the commercial banks in interbank market (%) Agribank

20 18 BIDV CTG VCB STB SCB MB ACB TCB SHB EIB HDB NVB Oceanbank PGB ABB VIB OCB BacABank DongABank KienLongBank VPBank MDB MHB SGB (6) The proportion of short-term capital used for mid- and long-term lending Limitation on the proportion of short-term capital used for

21 19 mid- and long-term lending is an indicator for credit institutions (CIs) to not chase term transformation in order to get high interest rate difference ignoring consideration of liquidity risk. Table 2.16: The proportion of short-term deposit used for midand long-term lending Type of CIs The proportion of short-term deposit used for mid- and long-term lending (%) 12/ / /2015 State-owned bank 21,45 22,28 29,66 Joint stock bank 17,60 18,39 28,97 Foreign bank Control of liquidity position Prevention of liquidity risk 2.3. GENERAL ASSESSMENT OF LIQUIDITY RISK OF THE VIETNAMESE BANKING SYSTEM Reasons of liquidity risk of Vietnam s commercial banks in the past years. - Macroeconomics policies - Limited size of charter capital of the Vietnamese banking system - Maturity mismatching of asset and liability - Customer structure and poor credit quality - A boom credit of the banking system

22 20 - Difficulties in capital mobilization - Reasons from customer side - Credibility of bank managers Reasons affecting ability of liquidity management of the Vietnamese commercial banks - Awareness of liquidity risk management of some Vietnam s commercial banks is limited. - Quality of human resource in liquidity management is poor - Information technology system in liquidity is backward - Lack of transparency and public of information - The commercial banks prioritize profitability rather than safety in liquidity - Capital mobilization and capital usage policies of the commercial banks - Poor ability to access market - Capacity of control and supervision of the commercial banks is low - A set of factors related to macro polices of the Government and the SBV - The financial market is less developed - Legal environment for banking activities in general and liquidity management in particular is incomplete. CHAPTER 3. SOLUTIONS TO PREVENT LIQUIDITY RISK AND ENHANCE CAPACITY OF LIQUIDITY RISK MANAGEMENT AT THE VIETNAMESE COMMERCIAL BANKS

23 KEY CHALLENGES AND ORIENTATIONS TO LIQUIDITY RISK MANAGEMENT ACTIVITIES OF THE VIETNMAESE COMMERCIAL BANKS Key challenges to the Vietnamese banking system Oriented development of the Vietnamese banking system Basic perspectives on liquidity risk management 3.2. SOLUTIONS TO PREVENT LIQUIDITY RISK AND ENHANCE CAPACITY OF LIQUIDTY RISK MANAGEMENT AT THE VIETNAMESE COMMERCIAL BANKS Solutions to prevent liquidity risk Increased equity to improve position and reputation of the commercial banks Diversifying capital mobilization and capital usage Do not pay interest for depositors who withdraw deposits before the maturity of the term Developing buying and selling debts activities Improving effectiveness of internal control Enhancing controlling and supervising the commercial banks Strengthening credibility and promoting banks to public Promoting activities of derivative market Enhancing capacity of enterprise governance in the context of economic integration Solutions to enhance capacity of liquidity management Introducing organizational model of liquidity management

24 Improving internal controls towards liquidity risk management Planning and selecting suitable strategies of liquidity management Refining mechanisms and policies to manage liquidity Applying cash flow model to manage liquidity Implementing restructure of asset and liability reasonably Training and retraining human resource, especially human resource specializing in management and use of capital Renovating accounting information in the commercial banks Promoting the development of the financial market Enhancing capacity of prediction of the SBV Solutions to cope with liquidity risk CONCLUSIONS The history of banking industry on the world has experiences for more than five centuries. Throughout that time, liquidity risk always goes along with the development of the industry. Despite less concern as compared to credit, interest rate and operation risks, largescale liquidity crises on the world have happened since the 1980s showing that liquidity risk demonstrates its importance and danger to the industry as well as the economy. The Vietnamese banking system is developing and more participating in the international market; as a result, it is more sensitive to liquidity risk. Consequently, researching and applying practices of liquidity safety management is vital. Doing so is required awareness and coordination between the SBV and the commercial

25 23 banks, in which awareness and initiative of the commercial banks play leading roles. Therefore, the dissertation with the title of Liquidity risk at the Vietnamese commercial banks contains meaningfulness in term of both theory and practice. The dissertation provides a systematic theory of liquidity risk management, and studies measures of liquidity risk management at certain advance commercial banks on the world. Based on this, the research clarify important issues that a bank need to concern to enhance capacity of liquidity risk management. In addition, the dissertation investigates current state of liquidity risk management of the Vietnamese banking system, assessing objectively real situation of liquidity risk management of the commercial banks. As a result, the author proposes solutions to prevent liquidity risk and enhance capacity of liquidity risk management and measures to cope with liquidity risk when it occurs. Hoping that updated information presented in the dissertation will have significant contribution to suggesting bank managers for research, orientation and implementation of liquidity risk management towards international standards and practices, thus leading to improvement of competitive capacity and position of the bank in domestic as well as the international markets. In order to complete the dissertation, the author received knowledge from theories and studies, especially valuable guidance of Assoc. Prof. Dr Le Van Luyen and Dr. Pham Thi Hoa. However, liquidity risk management is a broad issue in terms of both theory and practice. Hence, proposals and suggestions of the dissertation need to be added. In addition, the author could not access detailed

26 24 information and data of all commercial banks of Vietnam, so assessment of current state of liquidity risk management mainly was based on public information of a number of big commercial banks. Quantitative indicators of liquidity risk management was not investigated. This a gap for next studies. The author wish to receive valuable comments of scientists and scientific committee to be able to improve my knowledge related to the issue. Special thanks!

27 LIST OF PUBLICATIONS 1. Nguyen Bao Huyen, Dao Thi Thanh Tu (2011), Attracting and Enhancing Effectiveness of Remittances in Economic Development of Vietnam, Banking Review, No. 14, 2. Nguyen Bao Huyen, (2012), Lessons Learned from Banking Crisis 2008, Journal of Audit Studies, No Nguyen Bao Huyen, (2012), Discussion on Banking Supervision Model, Journal of Audit Studies, No Nguyen Bao Huyen, (2012), Implementation Process of Basel III in the Southeast Asian countries, Banking Science & Training Review, No Nguyen Bao Huyen, (2013), Implementation Process of Capital Adequacy Ratio of Vietnamese Commercial Banks, Journal of Audit Studies, No. 68