Commercial banking 2 assignment topic liquidity risk management of selected bank in vietnam 2

TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN ---***---Commercial Banking 2 Assignment Topic : Liquidity risk management of selected bank in Vietnam Group 3 – Corporate Finance CLC 60 ..... The proces

TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN

-*** -Commercial Banking 2 Assignment

Topic : Liquidity risk management of selected

bank in Vietnam

Group 3 – Corporate Finance CLC 60

HÀ NỘI, NĂM 2021

I OVERVIEW OF LIQUIDITY RISK MANAGEMENT 1

1 Overview of liquidity risk 1

1.1 The definition of liquidity risk 1

1.2 Types of liquidity risks of the commercial banking system 1

1.3 Signs identifying liquidity risk in the commercial banking system 2

1.4 Cause of liquidity risk 2

1.5 Influence of liquidity risk of commercial banks 2

2 Liquidity risk management in commercial banks 5

2.1 Definition of liquidity risk management 5

2.2 Why does liquidity risk management matter? 5

2.3 The process of liquidity risk management in commercial banks system 5

2.4 The policies and liquidity risk management tools of central bank to commercial banks .6

3 Lessons learned for Vietnamese commercial banks from the experiences of other countries in the world 6

II The current situation of liquidity risk management of the Vietnamese commercial banking system and VP Bank 7

1 An overview of the Vietnamese commercial banking system 7

1.1 Structure of Vietnam's commercial banking system 7

1.2 Charter capital 7

1.3 Business performance 9

1.4 Risks in Vietnam's commercial banking system 11

2 The current situation of liquidity risk management of Vietnamese commercial banks 13

2.1 General situation 13

2.2 Case study: Vietnam Prosperity Joint Stock Commercial Bank – VPBank 14

3 Causes and effects of the liquidity risk on commercial banks 17

3.1 Causes 17

3.2 Effects 18

III Solutions for liquidity risk management of selected banks in Vietnam .19

1 Orientation for liquidity risk management of selected banks in Vietnam .19

2 Liquid risk management solutions of Vietnam's commercial system .20

3 Recommendations to the government, related ministry and sector .21

References 22

I OVERVIEW OF LIQUIDITY RISK MANAGEMENT

1 Overview of liquidity risk

1.1 The definition of liquidity risk

1.1.1 Liquidity

In terms of assets: Liquidity is understood as the ability to convert assetsinto money

In terms of Bank's perspective: Liquidity is understood as the Bank's ability

to promptly and fully satisfy financial obligations arising in the course of itsbusiness operations, such as payment of deposits, loans, payments and otherfinancial transactions

1.1.2 Liquidity risk

There are many definitions of liquidity risk depending on differentapproaches of researchers After many carefully researches, in our group’s opinion:Liquidity risk is potential loss of finance, reputation can occur due to the Bank'sinability to fulfill payment obligations and make payments fully and on time ascommitted Liquidity risk is the financial loss of a commercial bank to overcomethe insolvency of the bank

1.2 Types of liquidity risks of the commercial banking system

- According to the structure: Liquidity risk can be divided into 4 groups: Liquidityrisk with early withdrawal, Term liquidity risk with correct liquidity conditions,Financing liquidity risk, Market liquidity risk

- According to the origin leading to liquidity risk: Liquidity risk is divided into 3groups: Liquidity risk from the Debt side, Liquidity risk from the Credit side, andLiquidity risk from off-balance sheet activities

1.3 Signs identifying liquidity risk in the commercial banking system

First, the bank has lost credibility in the market Second, about the volatility ofbank stock prices Third, the bank raised deposit rates to abnormally high Fourth,

the bank incurs losses from asset sales Fifth, there is a decrease in the ability tomeet loan requirements Sixth, banks are forced to borrow capital from the CentralBank and / or from the interbank market with large scale and high interest rates

Seventh, more residential deposits are withdrawn or an increase in term deposits is

withdrawn before maturity

1.4 Cause of liquidity risk

1.4.1 Group of objective causes:

- The instability of the macro-economy

- Interest rate sensitivity

- Liquidity needs of customers are getting higher and higher

- The forecasting capacity of the monetary authorities is weak

1.4.2 Group of subjective causes:

- Excessive credit growth compared to capital sources

- Holding low-quality, inflexible assets

- Inadequacies in the term structure of Assets and Liabilities

- High deposit concentration, less stable deposit structure

- Poor market access

- Poor system of risk management and internal control

- Commercial banks reduced public confidence

1.5 Influence of liquidity risk of commercial banks

Liquidity risk is the result of many reasons, the risk that the commercialbanking system cannot avoid in the history of existence and development, which isnot expected by the managers of commercial banks, but it is still is always apermanent threat that the managers of commercial banks must find a way to deal

with if they do not want to face the negative effects that liquidity risk causes tocommercial banks

1.5.1 Effects on operations of each bank and banking system

Firstly, when liquidity risk occurs and exceeds the bank's control, the bank

may fall into insolvency If there is no support from the central bank through thefunction of being the last lender to a commercial bank, it will go bankrupt or bemerged The bankruptcy of a bank due to the insolvency can cause a chain effectaffecting the operation and liquidity of the whole commercial banking system This

is a lesson learned after the 1997 Asian financial crisis

Second, a commercial bank must always face the trade-off between liquidity

and profitability This problem can be explained by the fact that when a bankchooses a liquidity target by maintaining a surplus liquidity status, it means thatthere is an amount of capital that is not put into profitable investment, the largerthis capital amount, the more profit the potential of the bank is reduced On thecontrary, if the bank chooses high profit target by maximizing the capital it can getinto profitable investment, the liquidity deficit will push the bank into liquidityrisk, detrimental to the banking operation

Third, if this happens, the business will be in trouble, the profits of

commercial banks will be reduced due to the cost of dealing with the lack ofliquidity, which will lead to contributions of commercial banks to the economysuch as: promoting growth, paying taxes to the state budget is greatly affected.And State management agencies will definitely pay more attention to the activities

of commercial banks Again, the managers certainly didn't like this

Fourth, liquidity difficulties still occur often, although in many cases, they

are not too serious to cause the bank to collapse immediately, but still dangerousenough to obstruct the business for a while, causing the bank to be dominated byother organizations, or have to change business strategy

Individuals and departments in charge of ensuring the right liquidity incommercial banks will normally have to find ways to maintain acceptable levels ofrisks, as well as in the form of trade-offs to get the best balance in activities andgoals If these goals are to be taken into account, any liquidity policy must bothconsider securing a liability and allowing the implementation of a subsequentprofit-related business strategy

There are two reasons why liquidity is so important to banks First, it isnecessary to have liquidity to meet new loan requirements without having towithdraw outstanding loans or liquidate loans, term investments Second, there is aneed for liquidity to respond to all the daily or seasonal fluctuations in the need fortimely and orderly withdrawals Because banks regularly mobilize short-termdeposits (with low interest rates) and lend them with long-term terms (higherinterest rates), the bank basically always has a huge need for liquidity

1.5.2 Impact on the economy

When a commercial bank is insolvent due to liquidity risk, anxiety arises notonly for banks with liquidity problems but also for customers of other banks In theoperations of the commercial banking system, trust plays a very important role inall activities, when trust is shaken, it can lead to a series of banks insolvency in ashort time, causing the whole commercial banking system to fall into chaos Thischaos could be the beginning of a series of disruptions in the commercial bankingsystem

Contribution of financial intermediaries in general and commercial banks inparticular to economic growth, to the State budget, to unemployment rate is verylarge Therefore, a collapse of a commercial bank not only affects the commercialbanking system, the financial system, but also affects the economy and politics incountry

2 Liquidity risk management in commercial banks

2.1 Definition of liquidity risk management

Liquidity risk management is the process of identifying, measuring,controlling and financing a bank's inability to meet its obligations to customers

In other words, it creates a plan to identify key liquidity risks and then build upsolutions to prevent or reduce the impact of liquidity risk, in order to make a moreeffective business strategy for the bank

2.2 Why does liquidity risk management matter?

The first is that the liquidity risk is the presence of trade-off between

liquidity risk and profitability of a bank

The second reason is that if liquidity risk happens, it might cause severe

consequences : starting from the loss of income or brand reputation and the mostserious one is the bank will go bankrupt

The third reason is that in special cases, liquidity risk will put commercial

banks into insolvency and then commercial banks might face the risk of goingbankrupt

2.3 The process of liquidity risk management in commercial banks system

 Liquidity risk management in commercial banks

 The purpose of liquidity risk management is to ensure the ability to paypromptly with reasonable costs Furthermore, it predicts the liquidity riskmight happen and loss if any

 Liquidity risk management in commercial banks should be deployed underthe “ 3 layers of defense model”

 Recognizing the sign of liquidity risk management : the increase in assets,speed of loan higher than the speed of deposits; the quality of credit reduces

significantly, the rise of capital financing costs and the focus of variousfunding sources on the wholesale market

 Measuring liquidity risk in many different ways

2.4 The policies and liquidity risk management tools of central bank to commercial banks.

 Central bank regulates on the liquidity risk management at commercialbanks

 Specific regulations include: solvency ratio, liquidity reserve ratio, 30-dayssolvency ratio, short-term multi-source ratio for medium and long termloans, credit limit, loan to deposit, limit of capital contribution to buyshares, In addition, the central bank also requires commercial banks topromulgate regulations on liquidity risk management

 Central bank decides to use monetary policy tools to manage liquidity risk ofcommercial banks such as: compulsory reserves, refinancing, interest rate,exchange rate, open market operation

 Liquidity risk measurement models of commercial banking system: stresstest model and early warning of liquidity stress model for commercialbanking system

3 Lessons learned for Vietnamese commercial banks from the experiences of other countries in the world

Through the general study of liquidity risk and management of liquidity risk

in the banking system of some countries, we can draw some lessons for Vietnam'scommercial banking system as follows:

Firstly, liquidity risk is a permanent risk in the banking system's business

operations

Secondly, liquidity risk is not only caused by the weakness in management

activities of liquidity risk of each commercial bank, but it is also influenced by a

series of factors outside the bank, especially factors relating to the monetary policy

of the central bank

Thirdly, in managing internal liquidity risk of each commercial bank, the

role of a reasonable and effective liquidity risk management system is extremelyimportant

Fourthly, there should be a comprehensive liquidity risk management

framework and a developed policy system

Fifthly, regular and periodic reporting, inspection and supervision are

indispensable

Sixthly, using tools to measure and monitor liquidity risk in order to

accurately calculate demand and solvency

II The current situation of liquidity risk management of the Vietnamese commercial banking system and VP Bank

1 An overview of the Vietnamese commercial banking system

1.1 Structure of Vietnam's commercial banking system

The Vietnamese banking system is constantly expanding in size anddiversity

operational nature, type of ownership In which, commercial banks in Vietnam aredivided into 6 categories based on ownership relations: first is a group of state-owned and commercial banks and joint-stock commercial banks that are dominated

by state shares, second are group of joint-stock commercial banks, and third isLLC, fourth is joint venture commercial banks, five is oversea branch ofcommercial bank and sixth are commercial banks with 100% foreign capital Theexpansion in scale, operation and the diversity of ownership forms of thecommercial banking system in Vietnam has contributed greatly in promotingeconomic development However, there are many commercial banks with

regulation and similar small tissue and service products create huge challenges aswell as risk management.

1.2 Charter capital

Charter capital is considered the core issue in business operations ofcommercial banks Charter capital means significantly for the existence anddevelopment of commercial banks because it is not only a condition for banks to

go into operation, but also a protective factor and a conditioning factor correction.From 2008 up to now, Vietnamese commercial banks have started to activelyincrease their capital rate to achieve the level of charter capital according to theprovisions of Decree 141/2006 / ND-CP and Decree 10/2011 / ND-CP datedJanuary 26, 2011 on amending and supplementing a number Article of Decree 141

According to the financial statements to 6/2020 of 27 banks and Agribank'sestimates, the total charter capital of 28 banks is VND 416,089 billion, an increase

of 1.94% compared to the end of 2019 In which The top 5 banks accounted for43% of the total charter capital of surveyed banks

As of June 30 2020, the order of the size of the banks' charter capital has notchanged much In which, BIDV continued to hold the leading position with 40,220billion dong, the same as the end of last year

Following are two other state-owned joint stock commercial banks,Vietcombank and VietinBank, with charter capital of 37,234 billion and 27,088billion dong, respectively Next is Techcombank with a charter capital of 35,000billion.

Agribank has not officially announced the charter capital data, but in the firsthalf of the year, the bank also has no information about the change of capital, sothe bank's charter capital is expected to remain at a level 30,591 billion VND

At private banks, excluding Techcombank, banks with high charter capital include:VPBank: 25,299 billion dong; MB: 24,370 billion VND; SCB: 20,231 billiondong; Sacombank: 18,852 billion Dong; SHB: 17,558 billion dong

1.3 Business performance

- Capital mobilization activities

According to the State Bank of Vietnam (SBV), as of the end of September

2020, the total means of payment for the economy reached more than 11.48 millionbillion dong, an increase of 8.63% compared to the beginning of the year Totaldeposits of customers in the system of credit institutions in the country as ofSeptember 30, 2020 was more than 9.48 million VND, an increase of 7.85%compared to the beginning of the year and 1, 66% compared to the end of August.Specifically, by the end of September 2020, residents' deposits at credit institutionswere more than 5.1 million billion, up 5.77% compared to the beginning of theyear and a rose of 0.27% compared to the end of August Residents' depositsincreased sharply in the first months of the year, but started to show signs ofslowdown from June 2020 to September 2020

Meanwhile, corporate deposits have risen sharply again in recent months As

of September 30, 2020, deposits of economic organizations (economic

organizations) at credit institutions nationwide were over 4.37 million dong, up10.39 percent from the beginning of the year and a rise of15 percent comparedwith the end of May 2020.

Especially, deposits of financial institutions tend to grow stronger thanresidential deposits at credit institutions in recent years Specifically, in 2019,financial institutions' deposits at credit institutions increased by 18.59% compared

to the end of 2018; while that of residents only increased by 10.36%

Statistics show that, since February 2020, the deposits of financialinstitutions at credit institutions have decreased significantly, but since May 2020,they have increased significantly compared to the previous month Deposit growth

of financial institutions remained high in June, August and September 2020 Themain reason is that many businesses have a large source of cash, not only do nothave the need to borrow from a bank, but also have a source of money to send tothe bank This can be explained by the effects of the Covid-19 pandemic, thedecline in the ability to consume domestic and export goods and the ability toprovide services to customers There are no investment opportunities and businessexpansion, and the economy is risky, so many businesses temporarily depositmoney in commercial banks (commercial banks)

Regarding the movement of people's deposits at commercial banks, also due

to the impact of the Covid-19 epidemic, narrowed business and investmentopportunities, high risks, and credit growth to the economy of the commercialbanks Commercial banks had some difficulties so commercial banks in turnsharply reduced mobilizing interest rates

More than 1 year ago, the highest domestic currency deposit interest rate ofcommercial banks such as VietAbank reached 9% / year, SCB up to 8.6% / year from June 2020, it started to decrease and until the end November 2020 decreased

to the highest level, only 7.1% - 7.3% / year