STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING ACADEMY GRADUATION THESIS Title: STRESS TEST IMPLEMENTATION IN VIET NAM INTERNATIONAL BANK LECTURER : MB. NGUYEN THI THU TRANG STUDENT : LE THU TRANG STUDENT ID : 18A4030314 CLASS : K18CLCB FACULTY : BANKING Ha noi – 2019 STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING ACADEMY GRADUATION THESIS Title: STRESS TEST IMPLEMENTATION IN VIET NAM INTERNATIONAL BANK LECTURER : MB. NGUYEN THI THU TRANG STUDENT : LE THU TRANG STUDENT ID : 18A4030314 CLASS : K18CLCB FACULTY : BANKING Hanoi – 2019 DECLARATIONS I declare the following: That the material contained in this graduation’s thesis is the end result of my own work and that due acknowledgement has been given in the bibliography and references to ALL sources be printed, electronic or personal. That unless this graduation’s thesis has been confirmed as confidential, I agree to an entire electronic copy or sections of the graduation’s thesis to being placed on the e-Learning at Baking Academy, if deemed appropriate, to allow future students the opportunity to see examples of past graduation’s thesis.
I understand that if displayed on the library of Baking Academy it would be made available for no longer than five years and those students would be able to print off copies or download. The authorship would remain anonymous. I agree to my graduation’s thesis being submitted to a plagiarism detection service, where it will be stored in a database and compared against work submitted from this or any other School or from other institutions using the service. In the event of the service detecting a high degree of similarity between content within the service this will be reported back to my supervisor, who may decide to undertake further investigation that may ultimately lead to disciplinary actions, should instances of plagiarism be detected.
Sign: Date: i ACKNOWLEDGEMENT I am indebted a great various thanks to many people giving support me during doing this graduation’s thesis. In the first place, I would like to express honest appreciation MB. Nguyen Thi Thu Trang for her assistance in the process of doing graduation’s thesis. She spent time and effort on discussing and giving me helpful advice to ensure that the research was kept on the right track.
Consequently, I was able to complete the research successfully. Secondly, I would like to thank all the lectures and tutors of Banking Academy who are always enthusiastic for helping me to gain knowledge and experience during the studying. Thirdly, I would like to express my grateful thanks to the leaders of Vietnam International Bank branches in general and Vietnam International Bank – Nguyen Tuan branch in particular for their help and supports during my studying. I also thank my family for their encouragements, support as well as motivation.
I wouls like to thank my parents for giving me the opportunity to let me undertake this journey. Last but not least, I would like to thank all of my friends who not only encourage my spirit but also put much effort to help me check my writing styles. Thank you! ii ABSTRACT This study aims to study about “Stress test Implementation in Vietnam International Bank”. To do that, this study have objectives of systematizing several theoretical and practical matters about risk management at Vietnam International Bank; studying the scenarios at VIB; and providing some solutions and predictation to improve the quality of risk management at VIB.
Moreover, qualitative research method is applied with secondary data is collected from books and journals about risk management. Internal reports about VIB’s activities and datas about internal policies and stress tesst process will be collected during period of 2010-2018. Other while, primary data is collected from interview with relevant people who are working in areas related to risk management in VIB. Major findings show that VIB have already had stress test policies and regulated Basel II and Circular 13, 41 comliance in VIB.
iii CONTENT DECLARATIONS. 1 1, Rationale of the study:. 2 3, Scope of the study. 4 4, Structure of the study.
4 CHAPTER I: THEORETICAL BACKGROUND AND LITERATURE REVIEW. Overview of stress test. Definition of stress test. Types of stress test.
Implementing Stress Testing:. Literature review about stress test. 22 CHARTER II: STRESS TEST IMPLEMENTATION IN VIETNAM INTERNATIONAL BANK. Overview of Viet Nam International Bank.
Internal policies of stress test in Vietnam International Bank. Stress test regulation:. Situation of stress test in Vietnam International Bank. Stress test Implementation in Vietnam International Bank:.
Develope Stress test scenarios. Calculating according to the scenarios. Reporting Stress test. 59 CHAPTER III: RECOMMENDATION TO IMPLEMENT STRESS TEST IN VIETNAM INTERNATIONAL BANK.
Recommend for Vienam International Bank:. Solutions to improve human resources:. Solution to complete information and communication system:. Improve risk management culture in the bank:.
Improve data collection systems. Basel recommendations to improve the efficiency Stress Test application. Recommend for State Bank of Vietnam:. Build information supply mechanism:.
Develop implementation plan and guideline for commercial banks to deploy Stress test. Establish a group of experts to carry out risk assessment at the SBV. 70 v ABBREVIATIONS VIB Vietnam International bank SBV State Bank of Vietnam BOD Board of director RMD Risk Management Division RCO Risk Committee CEO Chief Executive Officer BU Business unit BOM Board of Management RWA Risk-weight Asset NPL Non-Performing Loans AMC Asset Management Company VAMC Vietnam Asset Management Company vi LIST OF FIGURES AND TABLES Figure Content Page Figure 1.1 Events captured by stress testing 6 Figure 1.2 Formulating scenario test using portfolio- and event- 8 driven approaches Figure 1.3 The Decision Sequence for Formulating Stress Tests 9 Figure 1.4 Typical stress scenarios 11 Figure 1.5 Regulators prescribe stress tests for market risk 12 monitoring Figure 1.6 Seven steps to implementing stress tesing 15 Figure 1.7 The risk identification process 18 Figure 1.8 Impact of liquidity risk on a bank 20 Figure 2.1 Performance indicators of VIB in 2014-2018 29 Figure 2.2 Total assets of VIB in 2014-2018 30 Figure 2.3 Loans to customers balance of VIB in 2014-2018 30 Figure 2.4 Deposits & valuable papers of VIB in 2014-2018 31 Figure 2.5 Profit before tax of VIB in 2014-2018 31 Figure 2.6 Total assets over equity in 2014-2018 32 Figure 2.7 Process of stress test in VIB 43 Figure 2.8 Stress testing methodology 51 Figure 2.9 The stress test implementation process 53 Figure 2.10 Stress test timeline about sensitivity level 55 Figure 2.11 Senarios summary 56 Figure 2.12 Impact on Capital base in 4 scenarios 56 Figure 2.13 Impact on RWA in 4 scenarios 57 Figure 2.14 Stress test result 58 vii PREFACE 1, Rationale of the study: Commercial bank’s activities have to deal with a lot of risks, stress test is one of those activities. After the access into the World Trade Organization (WTO), the integration degree of Vietnam into the global economy has become increasingly deep and wide.
The world integration can bring to the banks in Vietnam with opportunities to learn, to acquire administration experiences as well as make full use of advanced technologies, to diversify products and services from countries with developed economies. However, the integration also raises many difficulties and challenges, of which the incalculable challenge for local banks is the force of risks in the business together with increasingly complex market factors, which have been liberated and appear more and more complex natures. It is because that: the higher the diversification of banking and financial products, the more the risk level is growing; the financial environment has changed constantly and is hard to be controlled and this is very likely to cause the domino reaction. Meanwhile, Vietnam's commercial banks have still lacked practical experiences, been perplexed in operating and controlling the activities of currency trading.
Therefore, in parallel with the comprehensive development goals, the good market risk management to create a stable business environment is now a great pressure over all commercial banks in Vietnam. Stress testing is a risk management tool used to simulate extreme but plausible events and measure how the events would impact capital and profitability in the bank. Stress testing aims to identify extreme events that could trigger catastrophic losses in a given portfolio. Here, exceptional refers to events of high severity and plausible excludes improbable scenarios.
Stress tests also provide actionable information to senior management for decisions around capital allocation and contingency planning. Stress test model was introduced in 1990, however, until the finacial crisis in 2008, this model have been applied widely. Until now, this model have been applied in almost all over the world. Meanwhile, in Vietnam, applying this model 1 till have some difficults.
In this thesis, i would apply stress test parallel with scenarios of interest rate, real estate and exchange rate to focase the status of VIB in 2019 and make solutions for ad hoc. Motivation of change is that according to ICAAP/Basel development, stress tests have to be implemented as a tool for predictive risk assessment and be component of internal risk management. In large banks, sensitivity analyses (one factor shocks) as well as scenario tests, for the consideration of correlated effects, should be in place. The stress tests should represent extraordinary, but feasible deviations of risk factors, as well as historical observed scenarios.
Therefore: Stress test policy and process need to be in place and periodically updated to ensure their reality and compliance with leading practices. Basel II team cooperates with related units to develop stress test policy and process. Also, due to lacking experiences, comprehensive views, socio-economic conditions, and the application of market risk management standards in accordance with current international standards into activities of the commercial banks in Vietnam in general and of Vietnam International Bank in particular is avery difficult issue and should be further discussed and clarified. From the theoretical and practical issues, I have choose the project titled: “Stress test Implementation in Vietnam International Bank ” in order to study and defend my graduation dissertation.
2, Research objectives As an intership of VIB, I have had the chances to deal with documents and datas concerning interest rate, exchange rate and real estate to enterprises generally. I also have a chance to observe the journey of circular 41 and 13 compliance in VIB. In 2015, Circular 41 implementation master plan was submitted to the SBV. In 2016, Calculation solution was built, enabled monthly CAR report; Data quality’s checking criteria were established; ICAAP implementation was initiated; Launched regular workshop with Business Units to increase awareness and understanding of risk quantification.
In 2017, Embedded CAR in business decision making; Risk data quality improvement became regular process; Requirement on Pillar 1 was fully completed; Risk governance framework was significantly enhanced following Pillar 2 requirement. In 2018, Internal Audit of CAR calculation was conducted; 2 CAR/RWA and related figures were disclosed; ICAAP implementation was approaching completion. In 2019, On 17 Apr 2019, SBV granted VIB the approval of early compliance, effective from 1 May 2019. With the consensus from Top management that Circular 41 implementation is not a one-off compliance exercise, but a transformation strategy, positive impacts have been brought to the bank’s operation: For business: Decision making process is prudent with risk information; For corporate gorvernance: Senior management is kept informed on the impact of business activities and strategies on risk profile of the bank; For risk management cuture: Risk management knowledge is bank-wide spread; For risk professional: Risk management competency is built and maintained within the bank.
Risk management in general and the market risk stress test in particular equal to some key values such as: Sustainable growth & corporate, Building competencies: A professional team of local specialists and Developing internal solution instead of buying external calculation engine.