MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY ---- --- ĐỖ THỊ NGỌC SƯƠNG APPLY BASEL II IN RISK MANAGEMENT IN VIETNAM CASE STYDY OF ASIA COMMERCIAL BANK MAJOR: BANKING AND FINANCE MAJOR CODE: 60.12 MASTER THESIS SUPERVISOR ASSOCIATE PROFESSOR Dr. TRƯƠNG TẤN THÀNH Faculty of Banking Ho Chi Minh City – 2010 - CERTIFICATE I certify that the substance of this thesis has not already been submitted for any degree and is not currently being submitted for any other degree or qualification. I also certify that, to the best of my knowledge, any help received in preparing this thesis, and all sources used have been acknowledged in this thesis. Signature: Do Thi Ngoc Suong Date: - ACKNOWLEDGEMENTS I owe a debt of gratitude to many people who helped me complete this thesis.
I would like to acknowledge the help of all. First of all I would like to express my deepest acknowledgement to my supervisor, Dr. Truong Tan Thanh, for his valuable advice and recommendations. Tran Van Tam, his assistants from Credit Policy and Management Department of Asia commercial bank (ACB) with reference material.
I would particularly like to thank the following friend for her support related to material: Ms. Ho Nguyen Thuy Duong from Asia commercial bank. Finally, to my parents, I wish to extend my loving thanks for their encouragement. -3 ABSTRACT Vietnam has gradually integrated into the global economy after officially becoming a member of the world trade organization (WTO) at the end of 2006.
Together with the process of economy liberalization, the priority of economic sectors is financial banking industry. These opportunities help Vietnamese banks get favorable conditions in banking activities, but face with a lot of difficulties and show weaknesses. Vietnamese banks can take advantage of capital, modern technology, management experience, and to develop the comparative advantage of Vietnamese banking to catch up with international competition and outreach foreign markets. However, commercial banks will face more competitive pressure, shows poor performance (weak financial resources, small scale, low quality and efficiency, low professional skill in management, low technology, and high risk), especially are more prone to adverse impact of external shocks (economic crisis, war, etc.
This reflects weak capability in reducing risks. As Governor Nguyen Van Giau said Monday (04/05/2009) in an interview published on the government website “The central bank would continue its efforts to keep the banking system secure and review banking and risk management regulations to comply with international standards”, after 23 banks around the world were taken over or went bankrupt in the first quarter 2009. This thesis examines a particular case of a joint-stock commercial bank in Vietnam to see the way they manage their risk: credit risk, operational risk and market risk. Objectives of this thesis are: (1) To study the methods of risk management in Basel I and Basel II.
(2) To study the level of Basel I and Basel II application in risk management at ACB in participate and at Vietnamese commercial banks in general. (3) To contribute some recommendations for the improvement of risk management at ACB and to expand for other commercial banks. -4 In terms of structure, the thesis has six chapters: Chapter 1 reviews the research background, significance and scope of the study. Chapter 2 reviews literature of risk management in Basel I and Basel II.
Objectives of this chapter will provide a brief overview of the characteristic of the 1988 Basel I Capital Accord, touching on its limitations and the reasons that prompted its revision in to the new 2004 Basel II Capital Accord. Chapter 3 presents Asia Commercial Bank, a joint-stock commercial bank in Vietnam. Chapter 4 presents descriptive findings of risk management practices at ACB. Objectives of this chapter are: (1) To observe the process of risk management at ACB for a period of time (from the beginning of 2006 until now).
(2) To evaluate the capacity of ACB’s risk management. Chapter 5 presents the tendency in risk management of Asian banks in general, of Vietnamese banks in participate. Finally, the thesis ends with Chapter 6. This chapter will give some recommendations to improve its risk management system for ACB in participate, for Vietnamese banks in general.
-5 TABLE OF CONTENTS CERTIFICATE. iii TABLE OF CONTENTS.v LISTS OF TABLES.viii LIST OF FIGURES. ix GLOSSARY OF TERMS AND ABBREVIATIONS.xi CHAPTER ONE: INTRODUCTION TO THE STUDY. Benefits with the risk management.
SIGNIFICANCE AND SCOPE OF THE STUDY. STRUCTURE OF THE STUDY.7 CHAPTER TWO: LITERATEUR REVIEW. Innovations of Basel II in comparison to Basel I.3 THE STUDY OF APPLYING BASEL I AND BASEL II IN RISK MANAGEMENT.4 THE EFFECTS AND BENEFITS IN BASEL I AND BASEL II APPLICATION 18 2.21 CHAPTER 3: ASIA COMMERCIAL BANK (ACB). OVERVIEW OF ACB.
ACB’S FINANCIAL PERFORMANCE. Charter capital, equity, secure capital ratio.32 CHAPTER 4: RISK MANAGEMENT AT ASIA COMMERCIAL BANK (ACB). RISK MANAGEMENT OVERVIEW AT ACB. Policy on credit risk.1 Observation of regulations and loan limits.2 Measures and outlook for loan quality.
Analysis on credit risk. Observation of regulations and loan limits. ACB’s limitations in credit risk management. Policy on market risk.
Analysis on market risk. Observation of regulations and limits. Measure and outlook risk market. ACB’s limitations in market risk management.
RISK MANAGEMENT DEVELOPMENTS AND COMPLIANCE.64 CHAPTER 5: TENDENCY IN RISK MANAGEMENT OF ASIAN BANKS IN GENERAL, OF VIETNAMESE BANKS IN PARTICIPATE. TENDENCY IN RISK MANAGEMENT OF ASIAN BANKS. Basel II Implementation schedule in Asia. Capital adequacy requirements in Asia.
Challenges on risk management for Asia. Challenges on credit risk. Operational risk challenges. Challenges for regulators.
The future of Basel II (Basel III). TENDENCY IN RISK MANAGEMENT OF VIETNAMESE BANKS. Legal and regulations.1 Bank for Investment and Development of Vietnam (BIDV). Rating of Moody's.
Implementation challenges for Vietnamese bank system. Cost of implementation. Inadequate supervisory capacity. Accurate credit risk factor estimation and calibration across many different portfolios 89 5.
A sound approach to operational risk. An efficient strategy for data gathering and management. An overarching economic capital framework for enterprise risk management. Approach-related challenges.
Standardize Approach-related challenges. IRB Approach-related challenges. STATE BANK OF VIETNAM (SBV). JOINT-STOCK BANKS.
IMPLICATION FOR FURTHER STUDY.102 - viii - LISTS OF TABLES Table 1.1: Benefits with the risk management.4: Compare (IRB) between Basel I and Basel II.5: Compare (standard) between Basel I and Basel II.6: “Ripple Effect” of Basel II.1: ACB’s products and service.2: ACB’s business performance structure in 2009.3: ACB’s net income structure in 2008 and 2009.4: ACB’s growth orientations.6: ACB’s profitability from 2004 to 2009.7: ACB’s liquidity from 2004 to 2009.8: ACB’s charter capital, equity, secure capital ratio from 2004 to 2009.1: ACB’s observation of regulations and loan limits (As of 31 December 2009).2: ACB’s provision for loans from 2007 to 2009.3: ACB’s daily reserves (As of 31 December 2009).4: ACB’s liquidity option (As of 31 December 2009).5: ACB’s components of tier 1 and tier 2 capitals, and risk weighted assets from 2007 to 2009.6: ACB’s factors of market risk sensitivity (As of 31 December 2009).1: Approaches and options of Basel II in Asia.2: Basel II implementation schedule in Asia.3: Capital adequacy requirements in Asia.4: The future of Basel II.5: Vietnamese banks' rating of Moody's.88 -9 LIST OF FIGURES Figure 1.1: The structure of risk.1: The structure of the Basel II Framework.2: Basel II affects a variety of constituents, whose needs for information are interdependent.1: ACB’s business performance from 2004 to 2009.2: ACB’s organizational chart.3: ACB’s shareholder structure (As of 31 December 2009).4: ACB’s branch network growth from 2004 to 2009.5: ACB’s branches nationwide (As of 31 December 2009).6: ACB’s human resource development from 2004 to 2009.7: ACB’s current ratio, ROE, ROA from 2004 to 2009.1: ACB’s organizational chart in risk management.3: ACB’s analysis by group from 2005 to 2009.4: ACB’s analysis by collateral from 2006 to 2009.5: ACB’s analysis by types of customers from 2004 to 2009.6: ACB’s analysis by types of loans from 2004 to 2009.7: ACB’s analysis by industry from 2004 to 2009.8: ACB’s analysis by contingencies and commitments from 2004 to 2009.9: ACB’s analysis by types of geography from 2004 to 2009.10: ACB’s analysis by types of maturity from 2004 to 2009.11: CAR of some commercial bank.12: ACB’s liquidity gap into relevant maturity grouping from 2006 to 2009.13: Group’s exposure to interest rate risk from 2007 to 2009.14: ACB’s exposure to foreign currency exchange rate risk from 2006 to 2009.1: Vietnamese banks' net interest margin from 2003 to 2008.2: Vietnamese banks' return on average total assets from 2003 to 2008.3: Vietnamese banks' loan to deposit ratios from 2003 to 2008.4: Vietnamese banks' cost/income ratios from 2003 to 2008.5: Vietnamese banks' CAR from 2003 to 2008.6: Vietnamese banking system's asset quality from 2006 to 2008.7: Vietnamese banks' asset quality from 2003 to 2008.8: BIDV’s organizational chart in risk management.9: TCB’s organizational chart in risk management.1: ACB’s building credit MIS on loan portfolio.99 - 11 GLOSSARY OF TERMS AND ABBREVIATIONS ACB : Asia Commercial Bank Agribank : Vietnam Bank for Agriculture and Rural Development AMA : Advanced Measurement Approach ASEAN : Associations of the organization of Southeast Asian Nations BASEL : Basel Capital Accord BCBS : Basel Committee on Banking Supervision BIA : Basic Indicator Approach BIDV : Bank for Investment and Development of Vietnam BFSR : Bank Financial Strength Rating CAR : Capital Adequacy Ratio CCF : Credit Conversion Factor EAB : East Asian bank EAD : Exposure at default ECAI : External Credit Assessment Institutions FSI : Financial Stability Institute IMA : Internal Model Approach IRBF : Internal Ratings Based Foundation IRBA : Internal Ratings Based Advanced KRI : Key Risk Indicators LGD : Loss given default LTD : Loan to Deposit MDB : Multilateral Development Banks MIS : Management Information System NPL : Non – Performing Loan OECD : Organization for Economic Cooperation and Development OTC : Over the counter PD : Probability of default PSE : Public Sector Entities - 12 RWA : Risk Weight Asset SA : Standardized Approach SCB : Standard Chartered Bank SMEs : Small and Medium Enterprises SOCBs : State –Owned Commercial Banks ST : Short-term TA : Technical Assistance Project TCB : Techcombank TCBS : The Complete Banking Solution Vietinbank : Vietnam joint stock commercial bank for industry and trade WTO : World Trade Organization -1 CHAPTER ONE: INTRODUCTION TO THE STUDY 1. Banking landscape After the implementation of the “doi moi” policy initiated by the Vietnam's Communist Party in 1986, the economy has gradually moved to market mechanism with socialist orientation, and integration to the world economy. Those reforms were of strategic importance in the past, and promoted the formulation and development of new economic relations as well as new infrastructure. As a result, the banking system was gradually improved and became more effective intermediation of financial resources.
Vietnam’s banks suffer from low public confidence, regulatory and managerial weakness, high levels of non-performing loans (NPL), non-compliance with the Basel capital standards, and the absence of international auditing. Since 1992 Vietnam’s banking system has consisted of a combination of state-owned, joint-stock, joint- venture, and foreign banks, but the state-owned commercial banks predominate, and they suffer from high levels of NPL, most of them to state-owned enterprises. Consequently, in September 2005 Vietnam decided to equitize all five state-owned banks—a change from previous plans to equitize only two of them. In addition, Vietnam plans to boost the transparency of its financial system by establishing a credit-rating agency and performance standards for joint-stock banks.
Risk Risk is the potential for the occurrence of an event that may incur losses for the bank. In other words, risk is about exposure to uncertainty. It includes credit risk, market risk, operational risk, strategic risk, business risk, country risk, sustainable lending risk, reputation risk. These risks are interdependent: -2 Reputational risk Credit risk Strategic risk Market Operational Country Strategic risk risk risk risk Sustainable lending risk Business risk Compliance risk Figure 1.