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 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. MBA Ha Nguyen TABLE OF CONTENTS ACKNOWLEDGEMENTS. iv LIST OF ABBREVIATIONS. x LIST OF TABLES.
xi LIST OF FIGURES. 1 CHAPTER I: LITERATURE REVIEW .2 Products & services provided by commercial banks .3 Roles of commercial bank in economics. Risk management in Commercial Bank. Risk in commercial bank.
Main risks in Commercial Bank. Risk Management in Commercial Bank. Liquidity Risk Management in Commercial Bank. Defining liquidity risk.
Basel and Basel II requirements. International Framework for Liquidity Risk Management in Commercial Bank 16 1. Liquidity risk tolerance. The responsibilities to manage liquidity risk.
Liquidity Risk Management Process. Liquidity risk in Vietnam Commercial bank system. Some typical events of liquidly risk in Viet Nam before year 2006. From the beginning of year 2006 to the end of year 2007.
From the beginning of year 2008 – the end of year 2008. From the beginning of year 2009 to the ending of year 2009. The first six months of year 2010. Summarized main reasons for liquidity crunch.
State Bank of Vietnam regulations. Practices for liquidity risk management. The Hongkong and Shanghai Bank Corporation. Asia Commercial Bank.
LIQUIDITY RISK MANAGEMENT IN LIENVIETBANK. Overview on LienVietBank. Liquidity risk in LienVietBank. SBV’s regulations on liquidity ratios in the activities of credit institution 46 2.
Supplies of Liquidity. Total mobilized funds and chartered capital. Measurement of Liquidity risk via Gap Analysis. LienVietBank’s Liquidity Gap report in VND (see table 2-11).
LienVietBank’s Liquidity Gap report in USD (see table 2-12). Assessment on current status of liquidity risk. General situation of risk management at LienVietBank. From establishment to end 2008.
For the year of 2009. From the beginning of 2010 to now. Liquidity risk management in LienVietBank. Strategy and Policy.
The responsibilities to manage liquidity risk. Process of liquidity risk management. Assessment on liquidity risk management in LienVietBank. Drawbacks on the current liquidity risk management in LienVietBank 78 2.
Strategy and policy. Process of liquidity risk management and contingency plan. Management information system. 80 CHAPTER 3 RECOMMENDATIONS AND SOLUTIONS .1 Some petitions for LienVietBank .1 Building a culture of risk management in LienVietBank.2 Building Liquidity risk strategy and policy .3 Improving organizational structure.4 Building process of liquidity risk management .5 Building contingency plan .6 Improving management information system .7 Improving human resources.
Some petitions for SBV. Some petitions for Government. 115 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 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. 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 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 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 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 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 Chapter 3: Recommendations and Solutions Conclusion References 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 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.edu/per1/webwn 2 Source: arcuclesbase.com 3 Source: http://www.com/commercial-bank.Rose, Peter and C.Hudgins, Sylvia, (2008), Bank management & Financial Services, page 6 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 finance consulting, custodial services for estates and Other Services trusts, safekeeping of securities and other valuable items, and money transfer services 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 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.