Solutions to improve the efficiency of risk management in bank for investment and development of vietnam JSC – cau giay branch

Through analyzing current activities in managingcredit risk, market risk and operational risk from 2010 to 2013, it can be seen that the riskmanagement system of Cau Giay branch worked w

ABSTRACT

The thesis focuses on current situations of risk management at Bank for Investment andDevelopment of Vietnam JSC – Cau Giay branch Through analyzing current activities in managingcredit risk, market risk and operational risk from 2010 to 2013, it can be seen that the riskmanagement system of Cau Giay branch worked well, which allowed the branch to have thecapability of minimizing losses and detecting risks

However, some limitations in human resource and information technology system also affectedbanking operation Therefore, solutions to encourage the quality of risk management activities inBIDV – Cau Giay branch should be considered, including of credit model diversification, creditevaluating improvement, information collecting and human resources quality improvement, andoverdue debt and non-performing loan avoidance

In conclusion, the thesis has already been completed in comparison with proposed objectives andtargets in the introduction

TABLE OF CONTENT

DECLARATION I ACKNOWLEDGEMENTS II ABSTRACT III TABLE OF CONTENT IV LIST OF TABLES AND CHARTS VII LIST OF ABBREVIATIONS VIII

INTRODUCTION 1

1 RATIONALE OF THE STUDY 1

2 AIMS OF THE STUDY 2

3 METHODS OF THE STUDY 2

4 SCOPE AND SUBJECT OF THE STUDY 3

5 STRUCTURE OF THE STUDY 3

CHAPTER I 4

LITERATURE REVIEW 4

1.1.RISKS 4

1.1.1 Definitions 4§§

1.1.2 The categories of risks 4§§

1.1.2.1 Credit risk 5§§

1.1.2.2 Market risk 7§§

1.1.2.3 Operational risk 8§§

1.2 RISK MANAGEMENT 10

1.2.1 Definitions 10§§

1.2.2 Risk measurement 11§§

1.2.2.1 Credit risk measurement 11§§

1.2.2.2 Market risk measurement 13§§

1.2.2.3 Operational risk measurement 15§§

1.3.RISK MANAGEMENT PROCESSES 17

1.3.1 Components of risk management process 17§§

1.3.2 Strategies for risk management 18§§

1.3.3 Roles in the risk management process 20§§

CHAPTER II 22

THE REALITY OF RISK MANAGEMENT IN BIDV – CAU GIAY BRANCH 22

2.1 OVERVIEW OF BIDV 22

2.1.1 General introduction about BIDV 22§§

2.1.2 Development orientation 23§§

2.2 OVERVIEW OF BIDV– CAU GIAY BRANCH 25

2.2.1 Organizational structure 26§§

2.3 CURRENT SITUATION OF RISK MANAGEMENT IN BIDV – CAU GIAY BRANCH 27

2.3.1 Current activities 27§§

2.3.1.1 Business performance 27§§

2.3.1.2 Fund mobilization 28§§

2.3.2 Current situation of credit risks at Cau Giay branch 30§§

2.3.2.1 Credit model 30§§

2.3.2.2 Overdue debt and NPL 32§§

2.3.2.3 Provision plan 34§§

2.3.2.4 Income from credit activities 35§§

2.3.3 Current situation of market risk management at Cau Giay branch 35§§

2.3.3.1 Interest risk management 35§§

2.3.3.2 Foreign exchange risk management 36§§

2.3.3.3 Liquidity risk management 36§§

2.3.4 Current situation of operational risk management at Cau Giay branch 37§§

2.3.4.1 Technology operation 37§§

2.3.4.2 Payment system 37§§

2.3.4.3 Operational control risk 38§§

2.3.5 The assessment of the risk management situation at BIDV – Cau Giay Branch during the 2010 – 2013 period 39§§

2.3.5.1 Achievements 39§§

2.5.3.3 Causes 40§§

2.4.STRENGTHS AND WEAKNESSES OF RISK MANAGEMENT AT CAU GIAY BRANCH 40

2.4.1 Strengths 40§§

2.4.2 Weaknesses 41§§

2.4.3 Opportunities 42§§

2.4.4 Challenges 43§§

CHAPTER III 44

SUGGESTIONS TO IMPROVE THE EFFICIENCY OF RISK MANAGEMENTIN BIDV – CAU GIAY BRANCH 44

3.1 THE DEVELOPMENT ORIENTATION OF BIDV 44

3.2 SUGGESTIONS TO IMPROVE THE EFFICIENCY OF RISK MANAGEMENT IN BIDV – CAU GIAY BRANCH 45

3.2.1 Credit model diversification 45§§

3.2.2 Credit evaluating improvement 46§§

3.2.3 Information collecting improvement 47§§

3.2.4 Overdue debt and non-performing loan advoidance 48§§

3.2.5 Human resources quality improvement 49§§

3.3 RECOMMENDATIONS 50

3.3.1 Recommendations to the Government 50§§

3.3.1 To State bank of Vietnam 51§§

3.3.2 To BIDV 51§§

CONCLUSION 53

REFERENCES 54

LIST OF TABLES AND CHARTS

TABLES

Table 1: NPL rate of BIDV against other banks 32

Table 2: Overdue debt and NPL proportion over 2011-2013 period of BIDV – Cau Giay Branch 33

Table 3: Provision plan over 2010-2013 period 34

Table 4: Income from credit activities over 2010 – 2013 period 35

FIGURES & CHARTS Figure 1: Three main types of risks 05

Figure 2: Sources of Operational Risk 09

Figure 3: Making Consistent Risk Management Decisions 18

Figure 4: Strategies for risk management 19

Figure 5: Roles in the Risk Management Process 21

Figure 6: The organizational structure of Cau Giay Branch 26

Chart 1: Total asset and Profit before tax of Cau Giay branch (2010-2013) 27

Chart 2: Fund mobilization situation of Cau Giay branch (2010-2013) 29

Chart 3: Outstanding loan on term over 2010-2013 period 30

Chart 4: Credit model in terms of borrower over 2010-2013 period 31

LIST OF ABBREVIATIONS

Vietnam

1 Rationale of the study

Thanks to new opportunities created by international economic integration, Vietnam economyhas achieved noticeable achievements recently It also has led to significant changes in the overalleconomy in general and particularly in Vietnam’s banking sector, especially in commercial banks Commercial banks in Vietnam have grown in both quality and quantity over the last few years It

is considered as a bridge which connects several sectors in the economy, a currency and creditcenter distributing to the sustainable development of the country

However, in the changing business environment and sharp competitions, those banks have toface with several risks from both external and internal sources Any problems arising from theactivities of banks can immediately and directly affect their clients and indirectly other involvedsubjects Moreover, the weakness of banking operations, the incompleteness in the policy systemand the likes have caused serious consequences such as increasing non-performing debts, losses,

or fraud According to the Banking Magazine of the State Bank of Vietnam (2012), there was anupward trends in non-performing debt rate, from 3.07% in December 2011 to 4.22% in April 2012

As the result, in order to prevent these consequences, creating an efficiency risk managementsystem must be the top priority of commercial banks Furthermore, any banks that can managerisks well will survive and develop in the market in the long run Therefore, the study for solution

to improve risk management is a frequent and urgent issue of banking industry in Vietnam.Risk management is also important to Cau Giay branch of Bank for Investment and Development

of Vietnam JSC, one of the most efficiently operating branches During the past years, the branchhas achieved certain successes in identification and managing risks; however, the riskmanagement polices has been incomplete and imperfect, resulting in high possibility of losses.Therefore, the branch has made an attempt to improve efficiency further

Because of above reasons, the topic: “Solutions to improve the efficiency of risk management inBank for Investment and Development of Vietnam JSC – Cau Giay branch” was chosen as theissues for this study

2 Aims of the study

The general aim of this thesis was to study risk management at Cau Giay branch of BIDV andthrough that, some suggestions and implications was proposed to enhance the efficiency of riskmanagement at Cau Giay branch, BIDV

The thesis answered main questions:

Firstly, what are the current situations of managing risks at Cau Giay branch?

Secondly, which implications BIDV - Cau Giay branch should apply to manage risks?

3 Methods of the study

In order to achieve the aim of the study, there was a combination between comparison andanalysis methods in order to find out the strengths, shortcomings, opportunities as well asrecommend some solutions for improving the efficiency of risk management in BIDV – Cau Giaybranch

Based on banks’ annual reports, financial statements, websites, newspapers, governmentpublication, finance journals, banking statistics, books, surveys and industry reports, the figure ofbusiness performance and credit activities such as total assets, profit before tax, fundmobilization, outstanding loan, and non – performing loans (NPL) during 2010 – 2013 period werecompared and analyzed to notice the trend and the quality of credit risk management There wasalso a comparison between NPL of BIDV and that of other commercial banks, which illustrated thecompetitiveness of BIDV in the market

In addition, the analyses in market and operational risk management were used to show thecapacity of Cau Giay branch when handling risks

4 Scope and subject of the study

My research mainly concentrates on risk management at BIDV, Cau Giay branch under theeconomic perspective in terms of space and in period 2010-2013 in term of time

5 Structure of the study

Apart from the introduction, conclusion, references and documents attached, the main content isdivided into three chapters as follows:

Chapter 1:“Literature review” gives brief introduction to the risks by compiling the different ideasand influences of experts about risks, risk management in banking, types of risks, riskmeasurements and risk management process

Chapter 2:“The reality of risk management in BIDV – Cau Giay Branch” focuses on the basis ofanalyzing the current situations and evaluating the management of risks over the years

Chapter 3:“Suggestions to improve the efficiency of risk management in BIDV – Cau Giay branch”brings some suggestions to minimize risks and thus increases risk management quality

CHAPTER ILITERATURE REVIEW

or hoped for Another definition of risk was provided by Bessis, J (2002) in which risk was defined

as the probability or threat of quantifiable damage, injury, liability, loss, or any other negativeoccurrence that is caused by external or internal vulnerabilities, and that may be avoided throughpreemptive action

Despite some different factors, these definitions all agree that risk is the chance that in someunfavorable and unexpected events will occur

In the banking industry, “Banking risks are defined as adverse impacts on bank’s profitabilityarising from several distinct sources of uncertainty” (Bessis (2002))

For the purposes of this thesis, risk is defined as the volatility of a corporation’s market value(Kupper, E (1999)) Therefore, all decisions may impact on a change in market value

1.1.2 The categories of risks

There are numerous methods to classify types of risks However, in practices, banks tend to focustheir energies and resources on understanding and managing the key drives that determinefinancial loss In that sense, they focus on three main types of risks: credit risk, market risk andoperational risk

Figure 1 provides a bird’s eye view on three main types of risk and its components

Figure 1: Three main types of risks

RISKS

RISK

MARKET RISK

(Source: Kupper, E (1999))1.1.2.1 Credit risk

Credit risk is one of the main risks of commercial banks that will affect the banks’ possibility ofsustainable operation Banks assume credit risk when they act as intermediaries of funds andcredit risk management lies at the heart of commercial banking

In a 1996 report, the Bank of International Settlement (BIS) defined credit risk as the risk that acounterparty will not settle an obligation for full value, either when due or at any time thereafter.After that, Viney, C (2009, p.728) found that credit risk was the possibility that a borrower or adebtor will not meet future financial obligation to pay interest installments or to repay debtprincipal when due

On the other hand, according to Decision No.493/2005/QD-NHNN dated 22 April, 2005 byVietnam government, credit risk is seen as the potential that a bank borrower or counterparty willdefault on any type of debt by failing to make payments when it is obligated to do

In short, these definitions share the same idea that credit risk is the potential financial lossresulting from the failure of customers to honour fully the terms of a loan or contract Thisdefinition is being expanded to include the risk of loss in portfolio value as a result of migrationfrom a higher risk grade to a lower one

Credit risk arises from a number of causes as follow:

 Trading risk

 Balance sheet risk

 Event risk

 Payments/Settlement risk

• From the banks themselves: Due to loose credit policies and procedures, ineffective riskmanagement, inappropriate customer credit’s need, insufficient professional qualification ofcredit staff…

• From the customers: Due to limited governance capacity of customers, capital incapablecustomers who are not able to carry out planned business, cheating customers

• From business environment: Due to reasons of force majeure (natural disasters, plague ),changing in macroeconomic policies and legal environment, asymmetric information

In the current changing business conditions, credit risk management becomes more complicated.That fact requires each bank must constantly enhance risk management capability, especiallycredit risk

 Types of credit risks

There are two main types of credit risk, credit default risk and credit spread risk

According to Winkler, G (2008, p.12), default risk is the risk of loss arising from a debtor beingunlikely to pay its loan obligations in full or from the debtor missing payment for more than 90days on any credit obligations Default risk may impact all credit transactions including loans,securities and derivatives

The credit spread is the excess premium over the government or risk-free rate required by themarket for taking on a certain assumed credit exposure

It is important to notice that the higher the credit rating, the smaller the credit spread Thus, thecredit spread risk is the risk of financial loss resulting from changes in the level of credit spreadsused in the marking-to-market of a fixed income product Changes in observed credit spreadsaffect the value of the portfolio and can lead to losses for traders or underperformance forportfolio managers

1.1.2.2 Market risk

Bank for International Settlement defines market risk as “the risk of losses in on- and sheet positions arising from movements in market prices.” In this respect, the main factorscontributing to market risk are equity, interest rate, foreign exchange, and commodity risk Thetotal market risk is the aggregation of all risk factors (Sironi, Resti, 2007; Dowd, 2002)

off-balance-Another definition is that market risk is the risk of adverse deviations of the mark-to-market value

of trading portfolio, due to market changes, during the period required to liquidate thetransaction

Market risk is also defined as the risk to earnings arising from changes in interest rates orexchange rates, or from fluctuations in bond, equity or commodity prices Banks are subject tomarket risk in both the management of their balance sheets and in their trading operations.

Banks are exposed to market risk via their trading activities and their balance sheets

The risks caused through trading activities are easier to detect by using Value at Risk method(VaR) than other risks

The other component of market risk is the interest rate risk on banks’ balance sheets

This risk results from timing differences in the repricing of assets and liabilities, and theinvestment of capital The capital allocated to this type of risk is intended to cover the potentialloss in earnings resulting from a change in interest rates Essentially this capital is an estimate ofthe cost of closing out the mismatches following an extreme event

1.1.2.3 Operational risk

According to global risk management survey of Deloitte, 8th edition, roughly 60% of institutionsrated their operational risk methodologies as well developed for both risk assessments and fortheir internal loss event database

Operational risk was for the first time treated as a self-contained regulatory issue in the

“Operational Risk Management” document published by the Basel Committee on BankingSupervision in 1998

The New Basel Accord defines operational risk as “The risk of direct or indirect loss resulting frominadequate or failed internal processes, people and systems or from external events.”

The potential financial loss is seen as a result of a breakdown in day-to-day operational processes.Operational risk can arise from failure in complying with policies, laws and regulations, from fraud

or forgery, or from a breakdown in the availability or integrity of services, systems or information

According to its measurement and management, operational risk can be divided into:

• Event risk: the risk in which losses of the bank are caused by rare events such as a majorsystems failure, process and control failures (e.g., errors and omissions), fraud, legal risk, andexternal disruption (e.g., fire or other catastrophes)

• Business risk: the risk that the bank will experience losses through unexpected changes in either(future) revenues (affected by volume and price) or (fixed) costs that are not due to credit or

market risk, but rather driven by fundamental (and unexpected) changes in the bank’scompetitive environment (e.g., price wars, changes in regulation, etc.).

A quick scan through Figure 2 reveals that the most worrying events are those that are very rare,yet could have a devastating impact on a business

Figure 2: Sources of Operational Risk

Regulation risk

• Currency convertibility risk

• Shift in credit rating

More specifically, risk management in banking designates the entire set of risk managementprocesses and models allowing banks to implement risk-based policies and practices They coverall techniques and management tools required for measuring, monitoring and controlling risks(Bessis, J (2002)) Therefore, the goal of risk management should be to identify any uneconomicrisk taking, in other words, to ensure that any risk-management activity is consistent with valuemaximization The ultimate objective should not be to minimize, or worse, to avoid all risks, but itshould be to find the optimal balance between risks taken and expected returns, optimizing therisk-reward trade-off, concentrating on the competitive advantage of the company.

Managing risks includes:

• Risk identification: Identifying factors that affect a potential loss in transactions of a bank, itsactivities, processes, and systems

• Risk measurement: Calculating or estimating the value of an identified risk using a chosenmethod or procedure

• Risk monitoring: Comparing measured risk values with values set by a bank, particularly in form

of limits and continual control of meeting the set limits

• Risk minimizing: Entering into transactions of a bank or performing its activities serving tomitigate exposure to risk

1.2.2.1 Credit risk measurement

 Criteria of measuring credit risk

Criteria of measuring credit risks include overdue debts, ratio of customers having bad debts, andnon-performing loans (NPL)

Gross overdue debts

Overdue debts rate = * 100

Gross debtsLow overdue debts rate proves that the credit quality is high When absolute numeric value of theoverdue debts goes down, if the gross debts increase then overdue debts rate has not reflectedthe nature of credit

Number of customers having

overdue debts

having bad debts Gross numbers of customers

having credit relationship

The more customers having overdue debts, the higher credit risk that banks have to face Thisratio also shows the quality of borrower’s risk evaluation of bank

Amount of NPL

Total outstanding loans

A higher than expected NPL rate may cause have serious consequences, affecting the banks, thecustomers, and sometimes in extremely bad cases, the economy NPL rate also reflects thereputation of banks If the bank works well, the NPL rate must be low

 Sources of losses on a credit portfolio

There are three factors that drive expected and unexpected losses on a credit portfolio:

• Customer default risk – determined by the risk-grade profile of the portfolio, the tenor of theexposures and the degree of exposure to country risk Typically, the default rates are calibrated tothose of Moody’s Investors Service and Standard & Poor’s Ratings Service

In order to measure risks caused by customers, banks use credit scoring technique In its earlymeaning, credit scores were assigned to each customer to indicate its risk level A good creditscoring model has to be highly discriminative: high scores reflect almost no risk and low scorescorrespond to very high risk The more highly discriminative the scoring system is, the moreborrower’s risks are detected In the past, credit scoring focused on measuring the risk that acustomer would not fulfill his/her financial obligations and run into payment debts Morerecently, credit scoring evolved to loss and exposure risk as well

• Exposure – the amount that is likely to be outstanding at the time of default This includescurrent drawn amounts as well as an allowance for contingent liabilities and undrawn lines

• Loss given default – determined by the level of security cover, the effectiveness of the work-outprocess and the credit cycle

Although progress has been made in the area of credit risk modeling, the industry as a whole isstill struggling to find a consistent measure of credit risk To overcome the lack of consistency,several industry initiatives are underway There are several credit rating agencies are taking amore active role in the credit oversight process in order to help banks measures credit risks.1.2.2.2 Market risk measurement

In order to manage market risks, major trading institutions have developed large scale riskmeasurement models While approaches may differ, most models measure and aggregate marketrisks in current positions at a highly detailed level The models employ a standard risk metric,Value-at-Risk (VaR), which is a lower tail percentile for the distribution of profit and loss (P&L).VaR measures the maximum loss in portfolio value over a one-day holding period with 97.5 percent confidence

In that sense, denoting the portfolio’s P&L by rt, so that each day t the bank forecasts rt+1 TheVaR forecast is the quantity r such that pr(rt+1 < r) = α over the next trading day Here α = 0.01 sothat the model predicts a lower bound on losses not to be exceeded with 99% confidence

For example, if an activity has a VaR of $10 million, it can be expected that in 29 out of 30 days,losses will be less than $10 million Conversely, in 1 out of 30 days, losses can be expected toexceed $10 million

Although VaR has been widely used, it also widely criticized tool to assess risks The reason is thatVaR does not capture the very low-probability events that are of real concern Moreover, it isbased on assumptions that may not be true in the real world

Therefore, risk managers have to notice 2 particular assumptions:

The first is the shape of the loss distribution under VaR, changes in asset prices are commonlyassumed to follow a normal distribution While this may be reasonable in some cases, it is nottrue in general Moreover, in extreme circumstances the distribution of asset prices can changeshape quite significantly

The second is the data period used to evaluate risks It is easy to believe that longer data seriescreate more reliable results when estimating price volatility and correlations, since they involve agreater number of data points However, when predicting events that may occur over in short-

term such as a week, circumstances that existed a year ago are usually irrelevant By contrast, theevents in the previous week could be very important and should be weighted more heavily in theforecasts of future price volatility

To overcome the shortcomings of the modeling process, the daily VaR estimation are maintained

by the banks for the purpose of “stress testing” or “back-testing” and are required by regulation

to be calculated with the same risk model used for internal measurement of trading risk

In terms of stress-testing, it is to see what happens under exceptional conditions A common way

to stress a portfolio is using extreme conditions that prevailed historically over a long period Thepractical way of identifying such worst – case scenarios is to examine the portfolio structure, toidentify its main exposures and their risk drivers, and to try several shocks on various parametersdriving the risk of the major exposures

In terms of back – testing, it is to ensure that models capture the actual deviations of theportfolios Back testing implies using the model with past data to check whether the modeleddeviations of values are in line or not with the historical deviations of values

1.2.2.3 Operational risk measurement

Management of operational risk is not a new practice It has always been important for banks totry to prevent fraud, maintain the integrity of internal controls, reduce errors in transactionprocessing, and so on in order to preserve the best quality services for their customers

However, what is relatively new is the view of operational risk management as a comprehensivepractice comparable to the management of credit and market risk in principle

In the past, banks relied almost exclusively upon internal control mechanisms within businesslines, supplemented by the audit function, to manage operational risk While these remainimportant, recently there has been an emergence of specific structures and processes aimed atmanaging operational risk because of greater dependence on technology and centralizedoperations which means that banks are becoming increasingly exposed to operational risk Some recent trends are:

• Banks are expanding their use of the Internet to service customers and perform basic functions

• Globalization is creating complex linkages between institutions and countries

• Part of the risk has been outsourced to third parties and so cannot be directly controlled

• Rules and regulations are expanding in an increasingly litigious society

Financial institutions face significant challenges in implementing a program to monitor themanagement of operational risk at the business unit In addition to periodically testing andmonitoring business unit management of operational risk, risk management needs to embed

quality assurance and quality control procedures into the testing process so that it candemonstrate its effectiveness.

Banks may choose different analytical or judgmental techniques to arrive at an overall operationalrisk level for the firm When measuring operational risk, it is required to estimate both theprobability of an operational loss event occurring and the potential size of the loss The riskfactors are generally quantitative but may be qualitative and subjective assessments translatedinto scores (such as an audit assessment) (Moosa, 2007) The set of risk factors often usedincludes variables that measure risk in each business unit, such as grades from qualitativeassessments including internal audit ratings; generic operational data such as volume, turnover,and complexity; and data on quality of operations such as error rate or measures of businessriskiness such as revenue volatility

One of ways to increase the focus on operational risk is to allocate it to its natural owners In mostcases, these are the managers of the businesses and support areas who have ultimateresponsibility for the continued operation of the organization If the businesses rely on servicesfrom central areas such as information technology, they must insist on service-level agreementsthat specify the amount of back-up protection and associated costs To avoid each businessfocusing on short-term costs, the service units need to define minimum standards that must becomplied with Although it is accepted that, in many cases, capital alone is insufficient to protectthe business, it is nevertheless important to make the level of risk as visible as possible forperformance management purposes

One of the main constraints to developing capital allocation rules for operational risk is theinformation base available to measure that risk in any meaningful way Some banks haveattempted to overcome this constraint by creating a reference to other companies or industriesthat do not assume any credit or market risk, and therefore derive their entire earnings volatilityfrom general business risk By expressing the findings in known measures, such as operatingexpenses, the results of these companies can be made comparable with those of the bank.Another approach is to draw on the loss experience of a range of different industries, includingthe insurance industry While this approach could provide a larger inventory of events, many ofthe relevant events, such as technology-driven losses, may not be published

There are four components to the management process:

Risk culture

• Communicate objectives

• Maintain core competency

• Develop a track record

• Define the desired shape and risk profile of the institution, covering the mix of businesses and

geographies

• Manage the risk profile at the business level, recognizing that risk management challenges and

responses can vary considerably between businesses

• Establish a management information system (MIS) that monitors performance and is tailored to

the requirements of each business

• Implement a performance management system that provides clear incentives to eliminate

unacceptable and unprofitable risks

These components are shown in figure 3

Figure 3: Making Consistent Risk Management Decisions

(Source: Elmer FunkeKupper, 1999)

management

In a bank, there are various ways to conduct risk management

Figure 4 provides an overview of the options that banks have when approaching a

risk The bank can decide to eliminate certain risks that are not consistent with its desired

financial eristic or, as often encountered in practice, the risks are not essential to the financial

asset created In order to eliminate specific risks the bank can use as a strategy portfolio

diversification or, in addition to this, can decide to buy insurance in the form of options or

actuarial insurance, for example, for event risks The banks can create certain business policies,

such as process control, due diligence procedures, in order to reduce the chances of certain losses

and even eliminate certain risks

Figure 4: Strategies for risk management

• Define strategic and non-strategic activities

• Take decision

• Align targets and risk appetite

Risk culturesive action

• Align targets and risk appetite

• Capture in warehouse

• Conduct stress testing

• Provide flexible reporting

• Allocate responsibility

• Ensure independent oversight

• Take a portfolio approach

(Source: Schroeck, 2002)

If the bank does not want to avoid some risk, it can decide to transfer it to other marketparticipants The decision to transfer the risk to other market participants is made on the basis ofwhether or not the bank has a competitive advantage in a specific segment and whether or not itcan achieve the fair market value for it

The alternative to transferring risks is to keep the risks, to absorb (manage) them Some risksmust or should be absorbed at the bank level, because they are to complex, or cannot be traded

or hedged easily or they are a business necessity

Some risks play a central role in the bank’s business purpose and should therefore not beeliminated or transferred

The instruments that banks can use in order to manage the risks can be:

• Diversification is a technique that mixes a wide variety of investments within a portfolio It is thespreading out of investments to reduce risks Diversification, typically, reduces the frequency ofboth worst-case and best-case outcomes, which generally reduces the bank’s probability offailure

Eliminate/ Avoid

Transfer

Absorb/ Manage

DiversifyInsureSet policy

Hold capitalHedge/ Sell

• Hedge is a position established in one market in an attempt to offset exposure to pricefluctuations in some opposite position in another market with the goal of minimizing one’sexposure to unwanted risk There are many specific financial vehicles to accomplish this, includinginsurance policies, forward contracts, swaps, options, many types of over-the-counter andderivative products, and perhaps most popularly, futures contracts.

• Internal insurance: The bank is supposed to have superior risk pooling skills for some risks, that

is, it is cheaper for the bank to hold a pool of risks internally than to buy external insurance

• Holding capital: For all other risks that cannot be diversified away or insured internally andwhich the bank decides to absorb, it has to make sure that it holds a sufficient amount of capital

in order to ensure that its probability of default is kept at a sufficiently low level

The first stage of the risk management process is to define the risk appetite of the institution Indeciding the shape and risk profile of the bank, the challenge is to differentiate clearly betweenactivities that are of strategic importance and those that are not

Figure 5 lists some of the responsibilities of management as part of the ‘top-down’ approach tomanaging risk

Figure 5: Roles in the Risk Management Process

• Allocate resources andcapital

• Optimize the portfolio;pick 'winners'

• Maintain a diversified portfolio

well-• Develop strategies tooptimize EVA

systems

• Structure transactions

• Optimize EVA atcustomer level

• Exit subperformingassets

(Source: Elmer Funke Kupper, 1999)

CHAPTER IITHE REALITY OF RISK MANAGEMENT IN BIDV – CAU GIAY BRANCH2.1 Overview of BIDV

BIDV is one of the three biggest banks in Vietnam with average total asset growth rate of 16.6%,average funding and credit growth of 16.3% and 17.3% for years in a row NPL ratio has beenrestricted below 3%

BIDV, the oldest Commercial Bank in Vietnam, was founded on 26th April 1957 under the nameBank for Construction of Vietnam History of construction and development of BIDV is a difficultand trial but very proud path associating with historic period against invaders and countryconstruction of Vietnam people.

• From 1981 to 1989: It existed under the name Bank for Investment and Construction of Vietnam

• From 1990 to 27/04/2012: It existed under the name Bank for Investment and Development ofVietnam (BIDV)

• From 27/04/2012 to now: It existed under the name Joint Stock Commercial Bank forInvestment and Development of Vietnam (BIDV)

• On 24 January, 2014: It was officially listed on Ho Chi Minh Stock Exchange

Along with country development, Joint Stock Commercial Bank for Investment and Development

of Vietnam contributed to postwar economic rehabilitation and implementation of the first year plan (1957-1965) In any circumstances, BIDV personnel always accomplish their mission- to

five-be a solider of the Party on monetary financial front and investment and development of country.Acknowledge the contribution of BIDV through the periods, the Party and the Socialist Republic ofVietnam have given to BIDV a lot of noble titles and rewards including First-Rate IndependenceMedal and Third-Rate Independence Medal; First-Rate, Third- Rate Labor Medal, recognize ashero of Labor in renovation period, Ho Chi Minh Medal, etc

BIDV operates in several fields, namely bank, insurance, stock and financial investments

• Bank: BIDV functions as a leading experienced bank of finance services, brokerage, loansyndication and advisory, modern, convenient banking products

• Insurance: BIDV provides products for non-life insurance designed to match the overall package

BIDV commits to provide the best modern banking-finance services to customers; bring the bestvalue to shareholders, create a professional and prominent working environment for employeesand pioneer in community development activities.

To become the most qualified, efficient and reputable Banking – Finance Group in Vietnam, thecore value of the bank is “Customer Orientation – Renovation and development – Creation andProfessionalism – Social Responsibility – Quality and Reliability.”

At the same time, service and product value orientation are:

Firstly, becoming the leader in making a comprehensive product solution to differentiate BIDV’swith other conventional banking products provided by other banks to attract customers

Secondly, providing best solutions to different targeted retail and corporate customer segments.Thirdly, providing solutions for customers’ problems arose in their business such as riskprevention solutions; value chain service package (suppliers of input materials, manufacturers,wholesale distributors and retail consumers) and the likes

Fourthly, providing a variety of excellent customer services to meet the increasing demands andcomplexities of clients both before and after the sale

Lastly, understanding customers’ needs and offer the best customer care policies

It includes 10 priority objectives, taking into account factors of breakthrough strategies which can

be achieved when BIDV focuses its appropriate resources to drastically deploy targets number 1, 7and 8

• Objective 1: Completing BIDV equitization plan (strategic sales component) towards building acomplete model of organization and management, strengthening the management capacity at alllevels to create a solid foundation for the development of a leading banking – finance group inVietnam;

• Objective 2: Comprehensively restructuring all aspects of the business to improve efficiency andquality; proactively control risks and ensure sustainable growth;

• Objective 3: Restructuring operation and improve business performance of subsidiaries, ventures; investment portfolio focusing on core business areas;

joint-• Objective 4: Maintaining and developing BIDV’s position and influence on financial markets andBIDV’s pioneering efforts to effectively implement monetary policies;

• Objective 5: Increasing risk management capacity; actively apply and manage risks inaccordance with business environment in Vietnam