LE MINH NGOC Operational Risk Management at Global Petro Sole Member Limited Commercial Bank (GPBank) Field: Financial Management Code: 8340202.01 Hanoi, 2024 LE MINH NGOC Operational Risk Management at Global Petro Sole Member Limited Commercial Bank (GPBank) Field: Financial Management Student ID: 21075059 Supervisor: PhD. Ngo Thi Ngoc Anh Hanoi, 2024 DECLARATION OF AUTHORSHIP I hereby declare that this thesis was carried out by myself under the guidance and supervision of Dr. Ngo Thi Ngoc Anh; and that the work contained and the results in it are true by author and have not violated research ethics. The data and figures presented in this thesis are for analysis, comments, and evaluations from various resources by my own work and have been duly acknowledged in the reference part.
In addition, other comments, reviews and data used by other authors, and organizations have been acknowledged, and explicitly cited. I will take full responsibility for any fraud detected in my thesis. Hanoi, 2024 Author ABSTRACT Keywords: risk, operational risk, operational risk management, operational risk incidents, commercial bank, GPBank. Amidst the context of vibrant economic development and significant adaptation of digital transformation of businesses in Vietnam in recent years, professional risk management plays a crucial role in the operational management and credit activities of commercial banks, including the Global Petrol Sole Member Limited Commercial Bank (GPbank).
First, relevant theories and concepts of risk management are discussed. Using qualitative methods, the policies, processes, and actual statistics related to risk management, which are stored and circulated at the Risk Management Department and GPBank, are identified and presented in different model flowcharts and tables. Based on the research results, a comprehensive analysis of the current GPBank's management quality in controlling operational risks is presented and discussed. Accordingly, most of the potential operational risks encountered come from limitations and inadequacies of transaction processes, transaction control and transaction management, and incidents related to information technology systems.
Non-compliance errors are often detected during inspection and supervision due to fluctuations and the lack of experienced human resources. Therefore, the thesis makes some recommendations, including advanced personnel training, updating the bank's information technology system, building risk measurement tools such as Key Risk Indicators (KRIs), and database analysis tools such as SQL to increase data usage efficiency. ACKNOWLEDGEMENT As a graduate student of the VNU - International School, I would like to send my appreciation to the teachers and school staff for their support throughout the study process of the Master of Financial Management program. Moreover, thanks to the program, I have an opportunity to acquire more knowledge regarding risk management and do research about it, which contributes a lot to my current work.
Besides, I would like to express the sincerest gratitude to my instructor, Dr. Ngo Thi Ngoc Anh, for her knowledge, advices and supports throughout the process of conducting this thesis. I'm very grateful that she always spent time supporting and helping me despite her busy schedule. I also would like to express my gratitude to my colleagues at GPBank for their advice and support that helps me to accomplish this thesis.
Last but not least, thanks to my family for their unconditional love and support that gave me a chance to gain knowledge and do this research. Thank you! Minh Ngoc Le TABLE OF CONTENTS ABSTRACT. 5 LIST OF TABLES. 8 LIST OF FIGURES.
Rationale of the thesis. Research objectives and research questions. Research subjects and research scope. Structure of Thesis.
4 CHAPTER 2: LITERATURE REVIEW. Operational risk in commercial banks. Risk in commercial banks. Operational risk in commercial banks.
Operational risk management in commercial banks. Risk management in commercial banks. Operational risk management in commercial banks. Operational Risk Management Process.
23 CHAPTER 3: RESEARCH METHODOLOGY. 29 CHAPTER 4: RESEARCH FINDINGS AND RECOMMENDATIONS. GPBank - Global Petro Sole Member Limited Commercial Bank. GPBank’s operational risk management performance.
Operational Management Framework. GPBank’s operational risk management procedure. GPBank’s operational risk management performance. 78 LIST OF TABLES Table 4.
The risk severity level criteria. The frequency of operational risk occurrence criteria. GPBank’s operational risk category. GPBank’s operational risk limit criteria.
GPBank’s operational risk incidents in 2022. Loss and Operational risk limit monitoring in 2020. 58 LIST OF FIGURES Figure 2.1 Characteristics of Operational Risk. Loss event types and Examples .3 Vulnerability level of cyber security in the world.
Number of cyber attacks in the banking and finance sector globally. The Three Lines of Defense Model. PwC’s Operational Risk Management Framework\. The Research Methodology Process.
GPBank’s Organizational Structure. GPBank's Operational Risk Management Framework. GPBank's operational risk management procedure in Three lines of defense. GPBank's operational risk management procedure.
Self-identifying operational risks and assessing material operational risk procedure. The number of operational risk incidents detected in 2020 – 2022. GPBank’s three – level of Operational Risk. The number of operational risk incidents self - detected by Units in 2020 – 2022.
Operational risk errors self – detected by Units in 2020 - 2022. Operational risks found by the Internal Audits in 2020 - 2022. GPBank operational risk incidents types detected from Audit Findings in 2020 - 2022. Operational risk errors incurred in GPBank’s business activities groups (2020 – 2022).
55 LIST OF ABBREVIATION USED WITHIN THE MANUAL No. ABBREVIATION DESCRIPTION 1 GPBank Global Petro Sole Member Limited Commercial Bank 2 ORM Operational Risk Management 3 BCBS Basel Committee on Banking Supervision 4 SBV State Bank of Vietnam 5 CEO Chief Executive Officer 6 ORI Operational risk incident 7 FMI Financial market infrastructure 8 BPM Business Process Mapping 9 KRI Key Risk Indicator CHAPTER 1: INTRODUCTION 1. Rationale of the thesis The banking industry faces many opportunities and challenges due to the complex global economic fluctuation. At the beginning of 2022, the global economy has finally started to recover by economic reopening after the pandemic.
However, the Russia – Ukraine war has significantly impacted the global market, from rising oil and food prices to inflation. The US Federal Reserve Bank (FED) and most central banks of other countries have implemented tightening monetary policies, increasing interest rates to fight inflation. As a result, economic growth is reduced, facing the risk of recession. In such a financial background, Vietnam’s economy is also significantly affected, especially in the banking industry.
In 2022, the banking industry faced significant challenges of market liquidity shortage due to increased interest rates to curb inflation and stabilize exchange rates, as well as the effects of handling some violations related to corporate bonds. These challenges are a test of the stability of the corporate governance framework, the level of professionalism in risk management, and the quality of capital safety. In the context of such vibrant economic development in recent years, many new risks have emerged from both outside and inside the economy. Risk management ability became more critical and necessary for Vietnam commercial banks to overcome difficulties in such a global economic situation.
Besides impacts from the global economy, Vietnam's commercial banks will face new challenges along with unknown threats from digital transformation activities or the opening of the post- Covid economy that allows foreign market penetration. With recent difficulties in the financial market, many banks have revealed weaknesses in risk control practices. Although there are many warnings by domestic and international experts and technical support projects about banking risk management issues, the outcomes did 1 not meet expectations, which urged banks to enhance their risk management capabilities. The issue of banking risks is always given special attention to research and analysis by banks in developed countries, even in a stable economic context.
With such severe impacts from both outside and inside, banking activities face various risks, including credit, interest, liquidity, operational risks, and emerging risks. Credit risk is highly considered the most important one among the listed risks. In fact, 70 to 90 percent of Vietnamese banking income comes from credit activities, which explains why credit risk is highly paid attention. Underestimating other types of risk management can lead to the consequences that when there are significant fluctuations in the financial market, a series of banks fall into the risk of liquidity loss.
Based on the existing challenges, operational risk deserves the most consideration and attention. Operational risks are the risk of loss due to causes such as people, incomplete or improper operation of processes, systems, and external objective events. The deficiency in managing operations risks can seriously cause financial or non-financial losses (reputation, law obligations, etc.) for commercial banks. Therefore, rigidly controlling and managing risks in internal banking operations is essential in maintaining stability in bank operations against influences from the current economic context.
Due to continuous policy changes for adaptation, commercial banks will inevitably have shortcomings in monitoring and ensuring the safety of internal banking operations. Many legal violations in banking activities occur due to poor performance in operational risk management. According to the Financial and Monetary Market Magazine in Vietnam, there have been violations related to corporate bond investment activities. The fact shows that operational risk management practice at Vietnamese commercial banks is still limited and must be adequately, professionally invested, and built.
Operational risk management should be enhanced and reformed reasonably and realistically in the context of world economic integration, modern technology 2 applications, and the global financial crisis. However, up to now, there are only a few studies have researched this subject based on the current economic context, and it is more challenging to apply in practice. Besides, the Global Petrol Sole Member Limited Commercial Bank (GPbank) operates on a small scale, with human resources and technology limitations. Although GPBank's operational risk management has been fully formed and meets basic requirements, the management practice must be implemented thoroughly and strictly.
To be fully prepared to cope with the coming unexpected changes in the economy, suitable and professional strategies are necessary to improve operational risk management effectiveness in GPBank's operation. Based on the above, I chose the topic “Operational risk management at Global Petrol Sole Member Limited Commercial Bank. Research objectives and research questions The study aims to show the current state of GPbank operational risk management, indicating limitations in managing methods and proposing solutions to improve the effectiveness of active risk management. With that target, the thesis will answer the following questions: ● What are operational risks at GPBank? ● How does GPBank perform operational risk management at the bank-wide level? ● What are solutions for GPBank to improve the efficiency of operational risk management? 1.
Research subjects and research scope The research will focus on the management of the headquarters department, which specializes in monitoring and handling operational risks. The Risk Management and Compliance division mainly supervises and manages risks arising from bank operations. For a realistic vision, the analysis will be limited to GPBank's operational risk management 3 status from 2020 - 2022. Because that period of time best reflects GPBank's risk management capacity when facing many substantial changes from external events.
Research Method The research will analyze and evaluate GPBank's management quality in controlling operational risks using qualitative methods. Research data will be collected directly from annual reports and documents related to risk management policies, processes, and actual statistics stored and circulated at the Risk Management Department and GPBank. Research contributions When researching operational risk management at a specific commercial bank such as GPBank, the research will be considered as a reference source for future research about operational risk management in particular and risk management at commercial banks in general. The study will illustrate a comprehensive vision of operational risk management at GPBank to induce its importance in maintaining and developing banks.
Besides the literature contribution, the thesis will help GPBank detect weaknesses and deficiencies in its procedures and performance that serve the bank's plan of development in the future.
