Luận văn liquidity risk management in banks case study

1.1 Introduction of liquidity risk 1.2 Liquidity risk classification 1.3 International standards in management and supervision of liquidity risk 1.3.1 Rasel’s principles for the manageme

VIETNAM NATIONAL UNIVERSITY, HANOI

HANOI SCHOOL OF BUSINESS

LIQUIDITY RISK MANAGEMENT IN BANKS

Case study: Liquidity risk management at Techcombank

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Tran Phuong Lan

Hanoi, June 2012

1.1 Introduction of liquidity risk

1.2 Liquidity risk classification

1.3 International standards in management and supervision of

liquidity risk

1.3.1 Rasel’s principles for the management and supervision of liquidity

risk

1.3.2 Liquidity measurement and management

1.3.3 Monitoring tools for liquidity risk management

1A State bank of Vietnam's regulations om liquidity risk

management

1.4.1 Capital adequacy ratio CAR

1.4.2 Credit limits

1.4.3 Limits on capital contribntion and share purchase

1.4.4 Ratio of granted credit to mobilized capital

1.4.5 Solvency ratios

1.5 Confonmity of State bank of Vietnam’s regulations to the

international standards in liquidity risk management

1.6 Lessons from other bank's liquidity risk management process

1.5.1 Overview of liquidily risk management policy

1.5.2 Liquidity risk paticy

CHAPTER 2: LIQUIDITY RISK MANAGEMENT

AT TECHCOMBANK

2.1 Techcormbank overview

2.2 Process af Liquidity risk management at ‘Techcombank

2.2.1 Liquidity risk measwrement at Techcombank

2.2.2 BOD and BOM’s sisk appetite on liquidity management at

“Techconnbank

2.2.3 Techcombank’s liquidity risk management structure

2.2.4 Techcombank’s Liquidity risk management flows

2.3 Assosements in liquidity risk management at Techcombank

2.3.1 Yechcorbank’s compliance toward Bazel and SBV's regulations 2.3.2 Strengths in liquidity risk managements

2.3.3 Weaknesses in liquidity risk management

CHAPTER 3: SOLUTIONS TO IMPROVE LIQUIDITY RISK

MANAGEMENT A'T TECLICOMBANK

3.1 Pursning ambitious business strategy

3.2 Investing in information technology

3.3 Systemic document on liquidity risk management

3.4 Resucluring organization and developing IR

3.5 Intelligent and flexible strategic in liquidity risk management

CONCLUSION:

REFERENCES

LIQUIDITY RISK MANAGEMENT IN BANKS Case study: Liquidity risk management at Techcombank

Pham Thi Thu Ha MBA candidate, 2009 - 2011 School of Business — Vietnam National University, Hanoi

Super ram Phuong Lau

INTRODUCTION Risk is inherent in any business in general and in financial sector in

particular it has become key ficuses for managers and regulators since some recent decades, specially liquidity risk, after some recent global financial crisis After and after each crisis, regulators want to implement stucler regulalions to prevent fincial institutions from liquidity difficulties Financial institutions’ managers alzo pay nutch more attention to liquidity issnes to ensnre hanks’ safe and durable development

The subject of thesis focuses on liquidity risk management This is nearly new and hot topic in Vietnam financial market, since State bank of Vielram has just issued regulations on prudential ralios in

2010 and scricg of ils amendmen right afler The regulations affect immediately hanks’ balance sheet structure and also long term

‘business orientation

It’s necessary to study on the subject to understand the international

principles, measurement and management practices to apply adequately in Vietnam environment Thesis aims haw to respond to local regulaions of SBV and step by step implement international

acceptable practices

Thess studies case af Techcombank, ane of mast snccessttil joint

siock in Vieinarn banking sector in the last decade ‘Techcombank

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also is good example to make analysis becanse the hank has applied nol only local regulations bul also slusting ilself lo sci up internal

requirements to reach intemational practices

CHAPTER 1: OVERVIEW OF LIQUIDITY RISK

MANAGEMENT IN BANKS

11 Introduction of liquidity risk

Liquidity is the ability of a bank to fand increases in assets and mmect

obligations as they come due, without incurring unacceptable losses

‘This definition is broader than that concept that is only possession of cash or azvels that can be readily converted into cash

Liquidity tisk management nowadays has become one of most challenging to any financial managers Understanding the term, tisk dlassification and measureinent thal help simagers well control the risk and lead business to achieve their targets and goals

1.2 Liquidity risk classification

According Lo best practice in Uk Gnancial market, liquidity risk is classified into three categories, including:

= Structural liquidity risk

+ Contingency Hiquidily risk

= Market liquidity zisk

1.3 International standards ia management and supervision of

assets, their marketability and assessing depositors, access to secured and unsecured funding gources

1.3.1.2 Governance of liquidity risk management

Principle 2: Bank should establish risk appetite for its own business,

inclnding liquidity risk tolerance

Principle 3: Hank should develop a strategy, policy and practices for

managing liquidity risk according to bank’s risk appetite These should be reviewed regniasly at least annmally

Principle 4: Bank should develop am intemal fund pricing system that inclndes liquidity costs, benefits and risks that products and services

create for bank’s portfolio

1.3.1.3 Measurement and management of liquidity risk

Principe 5: Bank should establish a sound process for indentifying,

micasuring, montiloring and controlling liquidity risk,

Principle 6: Bank should actively mortitor and control liqnidity risk Principle 7: Bank should develop an eftective and diversitied funding strategy

Principle 8: Barik should actively manage intraday liquidity position

to meet all payments on timely basis under normal and stress conditions,

Principle 9: Bank should uclively manage collaterid positions

Principle 10: Rank should condnct stress teste regularly for short term and bank case specific and market case specific After

conducting, stress test, bank could zeview and adjust Liquidity risk strategy and policy do develop effective contingency plan

Principle 11: Bank should have official coulingeney funding plan Uhal defiacs stralepics for liquidity stioi fills in emergency case

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Principle 12: Hank should maintain a cushion of mencumbered assetg, high quulily liquid asvets lo wilhtand a range of stucsyed scenarios

13.1.4 Public disclosure

Principle 13: Rank should publicly and regularly disclose

information so that market participants could know about the change

in liquidity risk management framework and liquidity position

1.4.1.5 The roles of supervisors

Principle 14: Supervisors should regutaily make comprehensive

assessment of overall Liquidity position and framework

Principle 15: Supervisors should supplement assessments of liquidity risk management framework by monitoring @ combination of internat

reparts, pridential reparts and market information

Principle 16: Supervisors should interveny (o require effective ad timely remedial actions to ensure bank's liquidity

Principle 17: Supervisors should communicate with regulators and other slakcholders Lo keep update and effectively cooperale regarding

to supervision and overview of liquidity risk management

13.2 Liquidity measurement and management

13.2.1 Liquidity Coverage Rata (LCR)

Stock of high - quality liquid assets Total net cash outflows over thenext 30 calendar days >100

LCR mcang minimun level of stock of high quality liquid assots that can be converted into cash to ensure bank's liquidity ducing 30 calendar day time horizon

1.3.2.2 Net Stable Fimaing Ratia NSTR

Available amount of stablefundimg 4)

Required amount of stable fun

NSPR is structured to ensure that long term assets are funded at least

a mtinimurm ammount of stable liabilidev in relation to their Liquidity tisk profile

1.3.3 Monttoring tools for liquidity risk management

13.3.1 Contractual maturity mismatch

Contractual maturity mismatch defines gaps between contractual

inflows and outflows for each time bucket This gap analysis helps managers know how much fwd ley need to raise up or sumplus Lor cach time bucket,

Funding liabilities sourced from each significan t counterparty

The bank's total balance sheet Funding lisbilities souroed from each significan t producténstrument

The bank's total balance sheet

List of as#et and liability amounts by significant currency

1.3.3.3 Available unencumbered assets

Available unencumbered assets are marketable as collateral in secondary market and/or eligible for central banks’ standing facilities

13.3.4 — Liquidity coverage ratio by siguificaul currency

lock of ing quably lguid setsim ech sigcogt Lam

Heh eutllows ever +30 day Laaep odin exch sigadicant wurtagy 1.4.3.5 Market related monitoring fools

Ferny Costeney Let

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Supervisors could monitor following information to focus on liquidity issues:

= Market wide information

- Information on financial sector

= Bank~specific information

1.4 State bank of Vietnam’s regulations on liquidity risk

management

1.4.1 Capital adequacy ratio— CAR

Individual capital adequacy ratio=

Banks must maintain CAR of 9% as individual and also consolidated capital adequacy ratio on the basis of consolidation of capital and assets of their own and their affiliated companies

in daily basis and currency basis (VND, USD, EUR, JBP)

Solvency ratios

‘There are two solvency ratios: overnight and 1-7days solvency ratio

_ Total assets payable on demand

1~ 7days solvency ratio =

Overnight solveney ratio: minimmm at 15%

1-7 days solvency raiio: miniztum at 100%

To monitor the solvency capacity, credit institutions must set up

momtoring table to support the forecast at least in the next 30 subsequent days, and tuke any necessary actions to bring the ratios

‘back to the limits

1.5 Conformity of State bank of Vietnam’s regulations to the

international standards in liquidity risk management

1⁄6 Lessons from other bank’s liquidity risk management

process

We'll take CitiGroup as a good cxample of liquidity risk

‘management and study Citigroup's liquidity risk management policy

as comprehensive example

tn liquidity sok policy, Citigroup lus puided:

Overview of liquidity risk policy

- Liquidily risk policy

- Risk management tools

= Roles and responsibilities of stakeholders

1.6.1 Overview of liquidity risk management policy

1.62 Liquidity risk policy

1.6.2.1 Liquidity standards

1.6.2.2 Funding and liquidity plan

1.62.3 Risk management taols

Now, the nerwork of branches is mere 301, covering 44 cifies fiam

Noh to South in Viclnam ‘Techcombank is the fis bank and umique up to now, received award of the pioneer in technological solutions im banking system in Vietnam, With more than 7 500 stafts, Techcombank serves over 2 millions individuals aud 60 thousands

corporations,

2.2 Liquidity management at Techcombank

2.2.1 Liquidity risk measurement at Techcombank

1-7 days solvency ratio for cach currency

Regulalory TrianaL Limit Trigger Internal Target No_| Solvency Ralio 31-Dec-10 | 31-Dec-11_ | 30-Mar-12 (100%) 119%) (11596)

1 | 1-7 day: Solvency Rafio fwr VNT 151.086 145.47% 171.405, Complied Complied Camplied'

2 | 1-7 days Solvency Ratio for USD | 159.84% | 140.16% | 11860% | Complicd | Comphed Complied

3 | 1-7 days Solvency Ratio forEUR | 146.70% | 52439% | 224.4096 | Complied Complied Complied

4 | 1-7 davs Solvency Ratio for GRP 1800.91% | 2362.65% | 21225000 Complied Complied Complied 1-7 days Solvency Ratio for other

5 | currencies “ 611379 | 238280% | Complied Complied Complied

Gvernight solvency ratio for each currency

Regulatery Tniernal Trigge Tnternai Target

No | Solvency Ratio 31-Dec-10 | 31-Dec-11 | 30-Mar-12 | Limit (15%) (15 598) (0)

1 | Ovemnight Solveney Ratio for VND | 1212⁄% | 2015% | 18109% | Comptied Complied Complied

2 | Overnight Solvency Rati forusD | 185 | 7.026 | 1670 | Complied Complied Comptied

3.| Ovemight Solvency Ratio for TUR | 28.62% 29.14% 24.90% | Comphed Complied Comptied

4 | Ovamight Solveney Ratio for pp | 329-52% | sg14qws | 299.0% | Complicd Complied Comptiod

‘Overnight Solvency Ralio for other

3 | currencies 9 96.00% | 11200% | Complied Complicd Complied

© Other currencies included insolvency vatia for UST

2.2.1 HOD and BOAEs risk appelilc øn liquidily manapemenL

at Techcombank

Since very earlier, Techcombank's BOD and BOM have clear view

in risk management in bank’s business and daily operations, incinding liquidity risk management Liquidity risk management is essential Lo the bank's development, Good Liquidity creates stable environment for the bank's business

This concept works through all Techcombank's business, specially,

in credil aclivilies ‘Techcombank issued Risk appolite for financial institutions to assess and classify them into three categories:

- Not wifling ta deal

- Deal in controlling closely specific conditions

= Nonmal deal

3.2.3 Techcombank’s liquidity risk management structure

In structure, Techcombank has two units responsible for managing liquidity riek management: Assets and Liabilities Committes and

‘Ireaswy, ‘hey work closely together and cooperate (o ensure vank's liquidity ALCO works directly with other business divisions to ensure bank's liquidity policy that corld be run throngh all business

‘Ireaswry division is link between (wo markets: inarkel of individuals and cooperates (inarket 1) and interbank market (market 2) to explore efficiently bank's funding, Under treasury, BSM also takes some duties of ALCO, to work and connect well between ALCO and

Treasury,

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