Liquidity risk management in asia commercial joint stock bank (2012 2016),graduation thesis

FACULTY OF FOREIGN LANGUAGES ------ GRADUATION THESIS LIQUIDITY RISK MANAGEMENT IN ASIA COMMERCIAL JOINT STOCK BANK Hanoi, May 2017... FACULTY OF FOREIGN LANGUAGES ------

FACULTY OF FOREIGN LANGUAGES

- -

GRADUATION THESIS LIQUIDITY RISK MANAGEMENT

IN ASIA COMMERCIAL JOINT STOCK BANK

Hanoi, May 2017

FACULTY OF FOREIGN LANGUAGES

- -

GRADUATION THESIS

LIQUIDITY RISK MANAGEMENT

IN ASIA COMMERCIAL JOINT STOCK BANK

This thesis empirically examines liquidity management in Asia Commercial Joint Stock Bank over the period of 2012- 2016 In the context of domestic economy’s slow-recovery from the global crisis of 2008 and the European sovereign public debt crisis of

2011, Asia Commercial Bank was not only swept up by the current of financial depression but also rose to its internal issues, especially liquidity problem The August,

2012 incident provoked alarm at the bank’s liquidity management and tumbled the whole stock market After five- years of the incident, ACB has already got back on track and recovered in a manner that targets long-term sustainable growth; however, there are

a number issues of liquidity management remained unresolved The thesis topic

“Liquidity Risk Management in Asia Commercial Joint Stock Bank (2012- 2016)” is subject to analyze the bank’s liquidity indicators and to reveal its fund structure’s flaws together with submitting recommendations upon enhancing ACB’s liquidity position and addressing live issues in the bank structure and business strategies The paper is released under limited time and author’s knowledge; therefore, there are potential shortcomings stemming on the research For further study, the thesis would be in-depth analysis and work out better in Asia Commercial Bank

I owe a deep debt of gratitude to my supervisor, Mrs Nguyen Thi Hien Hanh for her patient, encouragement and profound knowledge

I place on my record my sincere thanks to my sister Nguyen Thanh Nga and my friend Truong Van Han, who have stayed by my side in all lows and highs

I take this opportunity to express my heartfelt thanks to all my family members and long- standing friends for supporting spiritually through my lifetime

Thank you for all your encouragement!

Signature

Nguyen Thi Ngoc

Acknowledgement

Table of content

List of abbreviation

List of figure

List of table

CHAPTER I INTRODUCTION 1

1.1 Necessity of the thesis 1

1.2 Research questions 2

1.3 Research scope and subjective 2

1.4 Organization of the thesis 2

CHAPTER II LITERATURE REVIEW 3

2.1 Commercial bank & main risks in banking operation 3

2.1.1 Commercial bank 3

2.1.2 Main risks in banking operation 4

2.2 Liquidity risk management in commercial bank 5

2.2.1 Liquidity 5

2.2.2 Liquidity risk management in commercial bank 6

2.2.3 Liquidity measurements 8

2.2.4 Liquidity strategies 12

2.3 Liquidity management practice of Russia commercial banks in 2004 and lessons for Vietnamese commercial banks 14

2.2.1 Russian commercial bank risk in 2004 14

2.3.2 Lessons for Vietnamese commercial banks 15

3.1 Overview of Vietnamese economic and financial situations 17

3.1.1 Current state of economic and financial situations 17

3.1.2 Current state of banking sector 19

3.2 Introduction of Asia Commercial Bank 21

3.2.1 Brief overview of Asia Commercial Bank 21

3.2.2 SWOT analysis of Asia Commercial Bank 22

3.2.3 Business performance from 2012 to 2016 24

3.3 Liquidity management of Asia Commercial Bank 27

3.3.1 State Bank of Vietnam regulations on liquidity management 27

3.3.2 Liquidity management structure of Asia Commercial Bank 28

3.3.3 Liquidity measurements of Asia Commercial Bank 30

3.3.4 Evaluation 38

CHAPTER IV CONCLUSIONS AND RECOMMENDATIONS ON LIQUIDITY MANAGEMENT OF ASIA COMMERCIAL BANK 40

4.1 Orientation of Asia Commercial Bank’s development and liquidity management in the up- coming years 40

4.2 Solution to control over liquidity risk and enhance liquidity management capacity in Asia Commercial Bank 41

4.2.1 Some petitions for Asia Commercial Bank 41

4.2.2 Some petitions for government 44

4.2.3 Some petitions for the State Bank 45

REFERENCES 47

SBV The State Bank of Vietnam

CD Certificate of Deposit

Chart 3 1 Vietnam Gross Domestic Product from 2012 to 2016 18

Chart 3 2 Vietnam inflation rate from 2012 to 2016 18

Chart 3 3 Total assets of ACB from 2012 to 2016 25

Chart 3 4 Total fund- raising of ACB from 2012 to 2016 26

Chart 3 5 Total outstanding loans of ACB from 2012 to 2016 26

Chart 3 6 Total pretax profit of ACB from 2012 to 2016 27

Chart 3 7 ACB’s organizational structure 29

Chart 3 8 Cash position indicator of ACB, MB and Sacombank (2012- 2016) 32

Chart 3 9 Liquidity security ratio of ACB, MB and Sacombank (2012- 2016) 34

Chart 3 10.Capacity ratio of ACB compared with MB and Sacombank (2012- 2016)35 Chart 3 11 Deposit composition ratio of ACB compared with MB and Sacombank (2012- 2016) 37

Chart 3 12 Capital adequacy ratio of ACB compared with MB and Sacombank (2012-2016) 38

Table 3 1 Cash position indicator of ACB from 2011 to 2016 31

Table 3 2 Liquid security indicator of ACB from 2012 to 2016 33

Table 3 3 Capacity ratio of ACB from 2012 to 2016 34

Table 3 4 Net loans and lease in terms of maturity from 2012 to 2016 35

Table 3 5 Deposit composition ratio of ACB from 2012 to 2016 36

Table 3 6 Capital adequacy ratio of ACB from 2012 to 2016 37

CHAPTER I INTRODUCTION

1.1 NECESSITY OF THE THESIS

From banking management perspective, liquidity and profitability are key factors which should be taken consideration as their most important obligations The term “liquidity”

is used to described the ability of financial institutions satisfy their customers demand for cash while “profitability” generally refers to the amount by which bank’ revenues exceed its expenses That commercial banks ignore sound liquidity risk management but pay attention on the ultimate goal of maximizing profit may causes dilution effect and create difficulties to accesses to immediately spendable funds In fact, the financial crisis in 2008 proved that commercial banks did not reserve enough liquid assets to meet their obligation At that time, bank managers were struggling to deal with sudden withdrawal from depositors Consequently, without sufficient liquid assets, many banks became insolvency The failure of Northern Rock, used to known as the British’s fifth- biggest mortgage lender, is a shining example of liquidity risk caused by economic stress

Global economy underwent a period of slight growth at only a moderate level from 2012

to 2016 Recovery was hampered at a modest increasing estimated pace of 3.1% in 2016

by new challenges such as political conflicts in several parts of the world GDP in most economies shift to a remarkable lower path compared to pre-crisis level

As a case of Vietnam, the period of 2012- 2016 witnessed a sustainable rebound after the Great Recession Although GDP in 2016 is lower than expectation at 6.7%, inflation, bad debt, interest rate and real estate are gradually settled In financial sector, domestic banking system experienced a number of extensive changes including 18, 62% of credit growth, restructuring, economic violations and liquidity problem Especially, due to monetary policy and harsh competition for deposit from 2012 to 2016, liquidity management put a strain on bank managers than ever Moreover, that State Bank of Vietnam imposed the regulation regarding application of Basel II requires commercial banks to improve their liquidity risk management Despite being high on the list of commercial banks in Vietnam, ACB wobbled during two continuous incidents occurred

in August 2012 and 2013 respectively To sum up, the thesis “Liquidity risk

1.3 RESEARCH SCOPE AND SUBJECTIVE

The thesis examines the liquidity risk and application of liquidity management framework set by State Bank of Vietnam in ACB from 2012 to 2016 Moreover, it also makes evaluation based on figures and numbers in ACB’s financial report hence gives recommendations to upgrade capacity of liquidity management in this bank

1.4 ORGANIZATION OF THE THESIS

Thesis is divided into four main parts as follow:

Chapter I gives brief information on the thesis

Chapter II deals with theoretical issue relating liquidity and presents brief overview of liquidity management practice in Vietnamese banking system

Chapter III presents practice of liquidity management in ACB through the bank’s structure and liquidity indicator analysis

Chapter IV provides with liquidity management recommendations

CHAPTER II LITERATURE REVIEW

2.1 COMMERCIAL BANK & MAIN RISKS IN BANKING OPERATIONS 2.1.1 Commercial bank

2.1.1.1 Concept

According to the seventh edition of “Bank Management and Financial Services”, “a bank can be defined in term of the economic functions it serves, the services it offers, its customers or the legal basis for its existence” In general terms, bank is widely known

as a financial institution authorized by government to accept deposits and make loans The United State law defines banks as any institution which accepts deposits that the depositor has a legal right to withdraw on demand, and engages in the business of making commercial loans Following that, commercial bank is type of bank which takes deposits and makes loans to businesses and individuals

In Vietnamese law on credit institution number 47/2010/QH12, the term “commercial bank” is stated as a type of bank which may conduct all banking operations and other business activities under this Law for profit To be more specific, banking activities refer

to monetary activities and banking services with regular activities as deposit- taking, loan- making and payment service- offering via account

In short, a commercial bank is a bank whose main functions are to accept customer deposits and to make loans, thereby facilitating the transfer of funds in the economy

2.1.1.2 Products and services

Under Law number 47/2010/QH12, as profit- seeking institution, commercial banks appear to offer a large range of products and services to their customers, generally divided into core banking operations (from deposits to loans for individuals, institutions and governments) and other services relating to payment system and financial services Nowadays, these financial services are increasingly developed to include insurance agent, banking investment (security underwriting), advice for merger and acquisition firms and other comprehensive services

2.1.1.3 Roles of Commercial bank

The “Commercial Bank Module for ATC” indicates that most operations undertaken by commercial banks serve these four main different roles: intermediation role, payment

role, risk management role and policy role Acting as financial intermediaries, commercial banks transfer the deposits from individuals and institutions into loans to those who plan to make investment In this way, they repackage small deposits from individual investors in the form of larger loans to firm as well as satisfy the need for liquid Through economies of scale, banks help investors to lower cost and encourage higher rate of savings Serving payment role, commercial bank carry payment for goods and services on behalf of customers Regarding risk management role, commercial banks provide risk protection service through well- trained credit analysts who are able

to evaluate the creditworthiness of firms desperately seeking for funds Finally, banks contribute to the country economic development by strictly carrying out the monetary policy of the Central bank

2.1.2 Main risks in banking operations

In banking operation, commercial banks bear a number of risks arising from the occurrence of some expected or non- expected incidents According to the “Commercial Bank Module for ATC”, there are seven main types of risks as follow: credit risk, liquidity risk, market risk, operational risk, capital risk, legal risk and reputational risk Out of these seven, credit risk, market risk, operational risk and liquidity risk are regarded as the top four serious risks Though unfamiliar to bank operations, the other risks also attribute detrimental influences into bank’s profitability and solvency

In general, commercial banks perform crucial functions as money supply transmission, credit allocation, payment services through offering a wide range of special products and services Once these services are not provided, negative externalities arise Moreover, the failure of a bank may cause domino effect and affect the whole financial system

Risks in commercial bank are potential variation, both internal factors and external incidents Regarding external factors, incidents in the economy and the financial market often lead to unstable financial system To be more specific, bank’s loss might be due

to fluctuation in interest rates, foreign exchange rates, commodity prices and other indicators which is set in public market Furthermore, customer default on mortgage payment due to failure in doing business is able to pose a risk to the bank Of all these two causes, risk also results from internal factors including failed in internal process or

2.2 LIQUIDITY RISK MANAGEMENT IN COMMERCIAL BANK

The terms and approach relating to liquidity risk management defined in this part are mainly coined in “Bank Management and Financial Services”, 7th edition by Peter S Rose and Sylvia Hudgins and “Commercial Bank Module for ATC” by lectures in Banking Academy

2.2.1 Liquidity

2.2.1.1 The nature

From asset perspective, “Liquidity is an ability which assets can be converted into cash”

An asset called “liquid” if it is in line with these three rules First of all, a liquid asset has a ready market; therefore, there is no difficulty in converting it into cash Moreover,

an asset called liquid if it is quoted at a reasonably stable price so that no matter how long the asset is sold or how large the sale is, the market is deep enough to absorb the sale without a remarkable decrease in price And finally, a liquid asset is reversible, meaning the seller can recover his or her original investment with little risk of loss From banking management perspective, “Liquidity is an ability a commercial bank ready to accesses to immediately spendable funds at reasonable cost at precisely the time those funds are needed”

2.2.1.2 The Demand for and Supply of liquidity

For commercial banks, the urgent demand for spendable fund mainly comes from customer deposits withdrawal and credit request from quality loan customers or customers’ line of credit Demand for liquidity is likely to arise from non- deposit

borrowing repayment which commercial banks might take from other financial institutions or central bank previously In addition, payments of income taxes, other operating expenses and payment of stockholder cash dividend also acquire for cash funds

To cope with these demands, banks can rely on some following sources of liquidity Out

of the liquidity inflow, receipt of new customer deposits is normally the main source Furthermore, liquidity demand can be met by revenues from the sale of non- deposit services or assets Liquidity also flows from customer loan repayments and equity issuance, especially borrowing from the money market through marketable security from investment portfolio

2.2.1.3 Net liquidity position

The net liquidity position is determined by the different among various sources of demand for and supply of liquidity Sylvia formulated the net liquidity position (NLP)

at time t in “Bank Management and Financial Services” as follow:

Net liquidity position = Sources of liquidity supply – Sources of liquidity demand

In case the demand for liquidity exceeds or even equal to its supply, bank managers must stand ready for liquidity deficit as well as make decision when and how to raise additional funds In contrast, if the supply of liquidity exceeds its demand, bank managers must be willing to liquidity surplus and decide when and how to make profitable investment from these surplus funds for future cash needs

2.2.2 Liquidity risk management in commercial bank

Liquidity pressure derives from several sources First of all, financial institutions generally face with the maturity mismatch situation It is true that depository institutions

2.2.2.2 Liquidity risk management

Liquidity risk management is a process to identify, measure, control and finance risks when a bank cannot meet timely and sufficiently liquidity needs for customers

Managing liquidity risks are of paramount importance for these two following reasons First and foremost, there is a trade- off liquidity and profitability The more resources are tied up in readiness to meet demands for liquidity, the lower that financial firm’s expected profitability And if commercial banks are in liquidity deficit, meaning banks are unable to meet the demand for cash immediately which poses liquidity risk to the banks Another cogent reason is that liquidity risk produces disastrous consequences for depositor firms Depending on its level, liquidity risk leads bank to convert its assets into cash with high commission or to borrow from money market

In a bank, ALCO (Asset- Liability committee) shoulders the primary responsibility on liquidity management, specifically determining borrowing and lending strategies Their main tasks are determining the bank liquidity management policies by estimating the current liquidity ratio in compliance with bank resources; managing the capital adequacy and risk variation; controlling over financial indicators (ROA, ROE and etc.) and trading safeness and build an optimal structure of the bank’s balance sheet to maximize profit and limit risk level

2.2.3 Liquidity measurements

For decades, experienced bank managers have develops several measurement for estimate liquidity level Each method has its own advantages and disadvantages and merely estimates figures fairly accurately compared to actual requirement Concerning measurement of liquidity, this section mainly discuss three main methods as follows:

2.2.3.1 The sources and uses of funds approach

The sources and uses of funds approach method is adopted to estimate the liquidity needs with two simple facts: In a bank, liquidity increases when deposits increase and loans decrease On the other hand, liquidity increases when deposits increase and loans decrease

Whenever bank sources and uses of fund do not match, there is a liquidity gap, measured

by the differences between bank sources and uses of funds If sources of liquidity exceed its uses, the bank will have a positive liquidity gap In this case, bank managers have to invest the surplus funds in earning assets for future cash needs In contrast, the bank deals with a negative liquidity gap then bank must raise funds to cover cash deficit This approach must follow these three key steps For the first step, bank has to forecast loans and deposits for given liquidity planning period As well as that, the estimated changes in deposits and loans must be calculated for the same period At the end of this process, the manager must estimate the net liquid for the planning period in by comparing the change in loans and deposit Furthermore, there is a simpler method of calculating future deposits and loans by dividing the sources and uses of funds into three components: a trend component (using a reference point year- end, quarterly or monthly

LIQUIDITY MEASUREMENT

Thesourcesand usesFundsapproach

TheStructure

of Fundsapproach

The LiquidityIndicatorsapproach

loans and deposits total established over the last 10 years), a seasonal component (measuring sources and uses of funds due to seasonal changes in comparison to the most recent year- end bank funds flow), a cyclical component (depending upon the strengths and weaknesses of the economy in the current year)

2.2.3.2 The structure of funds approach

Another method to measure bank liquidity needs is the structure of funds approach This method using the liquidity requirement by some figures ready in institutional firm usually cope with liquidity problem At the first step, bank’s deposits and non- deposit liabilities are divided into three different categories including hot money liability, vulnerable funds and stable funds Hot money liability, often called volatile liabilities, are deposits and other borrowed funds that are very interest sensitive or that management

is sure will be withdrawn during the current period Vulnerable funds are customer deposits which make up substantial portion, perhaps 25- 30% and will probably be withdrawn during the current time period Stable funds, often called core deposits or core liabilities, are funds that management considers unlikely to be removed

In the next step, liquidity managers set aside liquid funds for each of these funds sources following these rules Specifically, the manager may decide to set up a 95% liquid reserve behind all hot money funds, while a common rule of thumb for vulnerable deposits and non- deposit liabilities is to hold 30% of their total amount in liquid reserve; and for stable funds, the liquid reserve takes small proportion about more or less than 15% of their total After that, the total liability liquidity reserve would be:

In fact, the liquidity requirements for funds sources and loans outstanding that make up the above equation and subjective estimates that depend greatly on management judgment, experience and attitude toward risk

2.2.3.3 The liquidity indicator approach

This approach is considered primary method for analysis in this thesis and the figures are within easy reach of bank’s financial statement Many commercial banks calculate their liquidity requirements according to experiences and banking industry averages Here are the certain liquidity indicators enormously useful in this thesis:

Cash position indicator is to measure ability to meet immediate cash needs This method gathers deposits and cash due from depositor institution, which are regarded as the main reserve of a bank

Hot money indicator is to measure ability to cover those liabilities by selling money market assets The money market assets cover short- term assets including cash and due from deposits held at other depository institutions, holding of short- term securities, Federal fund loans and reverse repurchase agreements while volatile liabilities are from large CDs, Eurocurrency deposits, Federal fund borrowings and repurchase agreements

=

Liquid securities indicator compares the most marketable securities the bank hold with the overall size of its asset portfolio The greater the proportion is, the more liquid the bank’s position tend to be

=Capacity ratio is a really negative liquidity indicator because loans and leases are often the most liquid assets This ratio shows the level to which the bank is loaned up The higher the ratio is, the worse the bank’s position occupies

=Core deposit indicator, unlikely capacity ratio, is a positive liquidity indicator to measure the stable base of deposits compared to its total assets Unlike to be withdrawn

on short notice, core deposits are small- denomination checking and savings accounts

as well as hold lower liquidity requirement These core deposits consist of total deposits less all deposits over $100,000

=Deposit composition ratio is to measure how stable a funding base each bank possesses Demand deposits can be withdrawn at any time via check writing while time deposits could not be accessed before in due The ratio suggests a decrease in greater deposit stability the bank hold lower the need for liquidity

Regarding advantages, the indicators are calculated based on historical financial data so that bank managers can compare and give comment about the changes in liquidity position with the previous financial years Furthermore, this approach are within easy reach through financial statement compared with two others Additionally, that using a wide range of indicators in an approach gives multi- faceted view of bank’s liquidity position

Apart from the benefit of using liquidity indicator approach, there are some drawbacks Frankly speaking, this method uses historical figures and make comparison to the last period; therefore, bank managers have difficulty in predicting and estimating exactly the bank liquidity position in the future Viewed from different angles, using industry averages for each indicators separately can be misleading because there are a number of outside and inside factors affect the bank’s liquidity position Moreover, liquidity managers tend to concentrate on changes in liquidity indicators rather than their own level, whereas the bottom line of the story is that the liquidity is increasing or decreasing and the reasons for these fluctuations

2.2.4 Liquidity strategies

When liquidity problem arises, selling bank’s assets and borrowing from other institutions are effective ways to cover immediate cash needs

2.2.4.1 Asset liquidity management strategies

This strategy suggests bank stores their reserves in form of liquid assets including cash and marketable securities As liquidity is on demand, selected assets will be sold until all demands for cash are satisfied

An asset called “liquid” must follow these three rules including marketable, stable price and reversible The most popular liquid assets are Treasury bills, Federal funds loans, certificates of deposit, municipal bonds, federal agency securities, bankers’ acceptance, and Eurocurrency loans

This strategy is likely adopted by small financial institutions because they find it less risky than borrowings; however, it suffers from several major drawbacks To begin with, selling assets means that a part of assets sales will be paid to security broker for transactions costs It is clear that there is an opportunity cost to store liquid assets

because bank will lost future returns these assets could make if they were not sold off Another weakness is that bank will take the risk of tremendous loss in case the market undergoes decreasing prices or rising interest rates Lastly, the assets sold give priority

to low- risk government securities which show the strong financial ability of a bank; therefore, this strategy might weaken the appearance of balance sheet

2.2.4.2 Borrowed liquidity management strategies

Known as purchased liquidity or liability management, this strategy uses the spendable funds borrowed immediately from other institutions to cover liquidity shortage Bank raises funds from Federal funds borrowings, repurchase agreements, issuing negotiable CDs or Eurocurrency deposits and borrow reserves from the discount window of the Central Bank

The borrowing liquid funds approach brings considerable advantages but besides it also contained some unwanted elements

Unlike asset liquidity management strategy which requires banks to maintain liquid assets at all the time then lowers expected rate of return, this strategy allows banks borrow only when they are in urgent need Another strong point of using this strategy is that bank can remain the profitable volume and composition of assets portfolio unchanged

On the other hands, this strategy also experiences several disadvantages Definitely, borrowing funds is the most risky strategy because the interest rate is volatile and the availability of credit is subject to a rapid change Due to uncertain borrowing cost, the earnings remain a question Another drawback is that a bank in liquidity problem is likely hungry for borrowed liquidity because of acknowledgement of customer panic spread and extraordinary cash needs; therefore, other financial institutions are unwilling

to lend a troubled bank due to risk of non- repayment

2.2.4.3 Balanced liquidity management strategies

This strategy is a hybrid model of Asset liquidity management and Liability management Under a balanced liquidity management strategy, bank will store some of liquidity reserves in liquid assets while future expected liquidity demands are insisted

on borrowing arrangements Specifically, unexpected cash shortage is alleviated by borrowings Otherwise, long- term liquidity needs can be satisfied by short- term and

to enhance the competitiveness of the banking system, to restructure the operation of the banking system and to ensure the banking system competitiveness internationally Subsequently, on March 1, 2012, the Prime Minister issued a proposal together with Decision 254 / QD-TTG to restructure the system of credit institutions in the period of 2011-2015

2.3.1 Russian commercial bank risk in 2004

The year 2004 saw Russian commercial banks suffered a new crisis which was sparked

by the closure of medium-sized Sodbiznesbank

In May, after the Central Bank of Russia found that 80% of Sodbiznesbank’s capital was artificial and more than $1 billion of “suspicious transactions” during routine inspections, Sodbiznesbank had its license taken away for numerous regulatory

violations and money laundering Soon another five banks had in great trouble since Russian biggest banks started cutting line of credit- the main source of capital of small institution as well as liquidity evaporated from the interbank market However, the fear actually haunted the whole Russian financial system and even the Central Bank of Russia only when Guta Bank stopped trading in the early July Guta Bank appeared to pose risks in the end of June when depositors queuing in front of branch offices withdrew money Consequently, the bank loss more than 10 billion robles (equal to $345 million) and on July 6, it officially shut down the network of 76 branches and 400 cash machines because of non- payment on customers’ accounts due to a higher-than-normal liquid demand in June and July In the evening of July 7, Chairman of Russian Central Bank Sergey Ignatiev confirmed that Guta-Bank was bought out by the state-owned Vneshtorgbank

A few days later, the panic swept over Alfa Bank, one of the national biggest commercial banks in Russia Dozens of customers blocked the Moscow branches of the bank as well

as its cash machines According to Alfa Vice President Mr Alexander Gafin, depositors had withdrawn USD 100 million in deposits since Saturday To ease the current situation, bank managers made decision to extend its working hours and impose 10% penalty of deposit withdrawal before maturity and their shareholders pumped USD 700 million cash into the bank At the same time, rumors that blacklist of 27 other commercial banks being on the verge of bankruptcy shot the interbank interest rate up drove some small bank insolvency

To stem the panic, on July 18,2004, Chaiman of the Central Bank Sergei Ignatiev and President of Russia Vladimir Vladimirovich Putin declared that there was no blacklist and financial system was healthy but temporarily beset by anxious depositors Following that, Mr Sergei Ignatiev came to a decision about lowering reserve requirement for a second time in a month from 10% down to 3.5% to enhance bank liability and pump over USD 3 billion of extra into the sector The Central Bank of Russia came with guarantee of deposits for all commercial banks, including those banks failed in May

2.3.2 Lessons for Vietnamese commercial banks

First and foremost, Vietnamese commercial banks need to measure and analyze appropriate the amount of liquidity reserve to assure liquidity position and to take every

advantages of bank’s cash Liquidity condition is not only determined by short- term spendable funds but also satisfied by investment into valuable papers which are easily converted into cash

The second key term for commercial banks is improving capacity of macroeconomic forecast Obviously, unexpected changes in financial market may provoke banking operations

Another concern is commercial bank need to be proactive to measure and handle liquidity risk In liquidity management process, bank should harmonize asset liquidity management and borrowed liquidity management to get the best out of idle cash on hand

as well as meet unexpected cash needs from near- term borrowings

The fourth point here is banking activities must followed faithfully specific standards to assure bank current position and avoid losses

And the bottom line of the story is that commercial bank must build a transparent system which focuses on “quality” rather than “quantity” A soundness systems keeps the bank away from rumors that makes a different to bank’s creditability leading to public inconfidence crisis

3.1.1 Current state of economic and financial situations

The period of 2012- 2016 saw the world economy undergoing a stage of slow recovery due to the global crisis of 2008 and the European sovereign public debt crisis of 2011 Vietnamese economy was not only swept up by the current of world financial depression but also rose to its internal issues

At the end of 2011, the rate of growth fell back to around 5.89% while the inflation rate surged to 18.13% At that time, the government promptly revised policies which gave top priorities to “macro-economic stability, inflation restraint, and reasonable growth”, together with restructuring finance-banking, public investment, state-owned enterprises The period of 2012- 2016 can be divided into two distinct stages At the first stage, from

2012 to the first half of 2013, Vietnamese economy was surrounded by a handful of emerging challenges and threats including high- level inflation rate, insane house price crash, stock market plunge, deficit in balance of payment, lending rate at high level, wild exchange rate fluctuation, liquidity problem in credit institutions, alarming bad debt and other unresolved issues These existing problems derived from inefficient state sectors accomplished with consequences of an economy model mainly counting on export, foreign investment capital and cheap labor resources Consequently, a sharp decline in onshore and offshore demands and unstable business environment took a direct hit into the competitiveness of the domestic economy, the attractiveness to foreign investment, and the confidence of individual and institutional investors From 2013 up to the present, the domestic economy has started to rebound, with the great effort of government policies aimed at removing obstacles in the path of inflation control, macro- economy stabilization, growth model reform and economy restructure

Chart 3 1 Vietnam Gross Domestic Product (GDP) from 2012 to 2016

Source: The General Statistics Office of Vietnam

The chart suggests that Vietnamese growth rate over five years is 5.91%, lower than the last period However, in the context of the domestic economy facing many difficulties, the upward trend in average growth rate reflects the Government’s enormous efforts to revive the whole economy, especially the year 2015 recorded breakthrough growth at 6.68% exceeding 0.48% compared with economic growth plan The slowdown in economic growth over the past five years posed some challenges in terms of narrowing development gaps compared to other regional countries

Chart 3 2 Vietnam inflation rate from 2012- 2016

Source: The General Statistics Office of Vietnam

0 1 2 3 4 5 6 7 8

It can be seen from the chart that inflation rate over five years is strictly controlled under 7% compared with the two- digit figure of 18.58% in the previous year, especially, Vietnam has recorded the lowest inflation rate in 2015 at 0.63% during 14 years Obviously, coordination between fiscal and monetary policy has been ensured to cope with inflation; however, the average inflation rate remain high during this period But frankly speaking, the combination of fiscal and monetary policies only focuses on solving each priority macroeconomic objectives for specific time To illustrate, as high inflation rate in 2011, that government adopted tight fiscal and monetary policies which has slowed growth rate However, when inflation has been controlled, policies to stimulate economy growth drives loose fiscal and monetary policies by stimulating investment, consumer demand which pulled inflation back on track in 2016

3.1.2 Current state of banking sector

By the time mentioned, Vietnamese banking sector can be summarized by these following characteristics:

Purging the whole banking system

Vietnamese banking system wobbled by continuous bank failures from 2012 to 2016 Nearly every month, there are bank officers arrested and prosecuted on charges of property misappropriation, breach of lending regulations, embezzlement and ect Every corner in the financial institutions enable to be subject to stringent investigations One

of the serious fraud case was Huynh Thi Huyen Nhu, the former deputy chief of the Risk Management Department of the Viet Nam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), was sentenced to life imprisonment for "swindling to appropriate assets" and "counterfeiting seals and materials of agencies and organizations" She was found to appropriate nearly VND 4 trillion (equal to USD 188.7

million) Another incident built buzz was four former officials of Asian Commercial Joint Stock Bank were all arrested for their involvements in a serious financial case in

2012 The top defendants of the case are Nguyen Duc Kien, a senior commercial banker, who had manipulated the banking industry and gold market before being arrested in August 2012 for economic violation including unauthorized trading, tax evasion and properties appropriation His arrest arose a contagion in the Vietnamese stock markets for three consecutive days, in which most stocks plunged 20% of their value The