Tài liệu Managing the market risks at vietnam joint stock commercial bank for industry and trade

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNMAM THE BANKING ACADEMY HOANG XUAN PHONG HOANG XUAN PHONG MARKET RISK MANAGEMENT AT VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE FIELD OF RESEARCH: FINANCE – BANKING CODE: 62.34.02.01 SUMMARY OF DOCTORAL DISSERTATION HA NOI - 2014 The dissertation is completed at: The Banking Academy Instructors: 1. Assoc. Prof., PhD. To Ngoc Hung 2. PhD. Hoang Viet Trung Opponent 1: Opponent 2: Opponent 3: The doctoral dissertation has been defended to the institutional level Jury at The Banking Academy At: …………..of………April 2014 The thesis can be found at the library of The Banking Academy and National Library of Vietnam. 1 INTRODUCTION 1. The necessity of the project After the access into the World Trade Organization (WTO), the integration degree of Vietnam into the global economy has become increasingly deep and wide. The world integration can bring to the banks in Vietnam with opportunities to learn, to acquire administration experiences as well as make full use of advanced technologies, to diversify products and services from countries with developed economies. However, the integration also raises many difficulties and challenges, of which the incalculable challenge for local banks is the force of risks in the business together with increasingly complex market factors, which have been liberated and appear more and more complex natures. It is because that: the higher the diversification of banking and financial products, the more the risk level is growing; the financial environment has changed constantly and is hard to be controlled and this is very likely to cause the domino reaction. Meanwhile, Vietnam's commercial banks have still lacked practical experiences, been perplexed in operating and controlling the activities of currency trading. Therefore, in parallel with the comprehensive development goals, the good market risk management to create a stable business environment is now a great pressure over all commercial banks in Vietnam. In that context, studying and managing the market risk to minimize the losses for commercial banks is a very important issue with theoretical and practical pressing significance both on the global level and in each country. From the late 2002, to further enhance the tolerance of commercial banks against bad situations in business operations, as well as to ensure the safety of the system, the Commission on Banking Supervision headquartered in Basel has issued regulations to standardize the market risk management. Since then now, the tools and methods of 2 quantifying the values with market risks have been improved and continuously invested. In recent years, Vietnam Joint Stock Commercial Bank for Industry and Trade has adopted a number of policies on minimizing the market risks in order to be able to stand strongly in the competition and determined to implement its strategies of building Vietnam Joint Stock Commercial Bank for Industry and Trade into a powerful financial conglomerate of Vietnam, the region and the world. However, under the current volatile economic environment conditions, interest rates and exchange rates..., which have been changing constantly and unpredictably at various times, have brought considerable damages to the bank. Also, due to lacking experiences, comprehensive views, socioeconomic conditions, and the application of market risk management standards in accordance with current international standards into activities of the commercial banks in Vietnam in general and of Vietnam Joint Stock Commercial Bank for Industry and Trade in particular is a very difficult issue and should be further discussed and clarified. From the theoretical and practical issues, I have choose the project titled: “ Market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade” in order to study and defend my doctoral dissertation. 2. Research situation So far, there have been many scientific research projects regarding the risk management at commercial banks such as Hennie van Greuing and Sonia Brajovic Bratanovic with the research named “ANALYZING AND MANAGING BANKING RISK” 2003. In their research, authors have mainly demonstrated the method of quantifying the market risks with the Value At Risk (VAR) techniques. Methods of calculating VAR include: Historical Method, The Variance-Covariance Method and Monte Carlo Simulation. Currently, there has been no project on the in- 3 depth research of this issue in Vietnam, however, it should mention the master thesis of Du Thi Minh “Managing exchange rate risk in forex trading operations at Military Bank-Actual situations and solutions”, 2012, The Banking Academy; “Solutions to managing interest rate risk at Vietnam Bank for Agriculture and Rural Development” – the economic doctoral dissertation of the author Do Thi Kim Hao-2005. In general, researches on market risk management at commercial banks in a comprehensive manner is very limited. The sector-level scientific research project on "Methods of managing market risk at commercial banks in Vietnam", PhD. Pham Huy Hung coded KNH200802, 2010 is one of the most comprehensive research projects to date on the contents of market risk management in Vietnam. However, research objectives of the project focus on several methods of quantifying market risk and applying the above methods of quantifying for the commercial bank system in Vietnam. Most of research projects in Vietnam have not yet accessed to the comprehensive market risk management at commercial banks in an overall manner, including interest rate risk and foreign exchange risk, not combined theoretical issues with practical operations in order to clarify the basic objectives and contents of the market risk management, generally researching methods for quantifying market risks; previous researches have not raised complete solutions, overall recommendations from models, procedure of market risk management, methods employed for administrating, forecasting market movements... especially associated with the specific conditions of Vietnam Joint Stock Commercial Bank for Industry and Trade. The above “blank spaces” have suggested the author new research directions in order to well implement the dissertation. Therefore, it can be confirmed that the thesis titled “ Market risk management at Vietnam Joint Stock Commercial Bank for Industry and 4 Trade” is the first doctoral dissertation which has systematically and comprehensively studied contents of market risk management at banks as theoretical basis for assessing the actual situation and proposing solutions to improving capacities of market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade. 3. Dissertation objectives On the basis of clarifying the general theoretical issues about market risk, methods of identifying, measuring and controlling market risk, the system of market risk management softwares at commercial banks; analyzing and evaluating the status quo of the market risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade; the thesis proposed solutions to improving market risk management ability at Vietnam Joint Stock Commercial Bank for Industry and Trade in accordance with international practices. 4. Research subjects and scope - Research subjects of the dissertation: The theoretical and practical issues about market risks and market risk management at commercial banks. - Research scope: Managing market risk (including interest rate risk and exchange rate risk) at Vietnam Joint Stock Commercial Bank for Industry and Trade from 2008 to 2012 and vision up to 2015 5. Research methodologies Method of dialectical materialism and historical materialism, logical method, statistical and synthesic methods, other methods such as: comparative, inductive, deductive moethods. 6. Contributions of the thesis The dissertation systematizes, clarifies theories on market risk management in the context of world economic integration and increasing competitive pressures in the business activities of commercial banks; introducing basic contents about market risk (within the scope: interest rate risk and exchange rate risk) of 5 commercial banks. Especially, the thesis has suggested ways of building a standardized system about market risk management at commercial banks from model, procedure and policy of market risk management; stating experiences about market risk management at some foreign commercial banks and drawn lessons for Vietnam. Based on surveyed information, practical materials, the thesis has introduced the overview about Vietinbank, analyzing the status quo of the market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade, pointing out basic successes and shortcomings, weakness and causes of market risk management of the Bank - as the basis for proposing innovation solutions, completing the market risk management of Vietinbank in the coming time. The dissertation has recommended 06 systems of solutions appropriate to the conditions of Vietnam Joint Stock Commercial Bank for Industry and Trade from building the risk management framework in accordance with international standards; building, completing policy on market risk management; completing model, procedure, methods and tools of market risk management ; solutions to enhance modern technical equipments, set up risk management softwares; strengthening the predictabilities to training to the staff of officials in charge of market risk management to better implement the market risk management of Vietinbank market risk in the future. 7. The dissertation structure In addition to the introduction and conclusions, the thesis is structured into 03 chapters as follows: Chapter 1: General issues about the market risk management of commercial banks Chapter 2: Market risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade Chapter 3: Solutions to improving ability of the market risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade 6 Chapter 1 GENERAL ISSUES ON THE MARKET RISK MANAGEMENT OF COMMERCIAL BANKS 1.1. Market risk in operations of commercial banks 1.1.1. The concept of market risk The market risks may be defined as the possibility of loss to the bank cause by the changes in market variables. It is the risk that the value of on-/ of- balance sheet positions will be adversely effeced by the movements in equity and interest rate markets, currency exchange rates and commodity prices, or risks for earnings and capital of the bank due to changes in the market level of interest rates, prices of securities, foreign exchange and equities as well as the volatilities of those prices . 1.1.2. Types of the market risks In general, the market risk includes interest rate risk, foreign exchange risk, securities risk and commodity risk. 1.1.2.1. Interest rate risk a. The concept of the interest rate risk The interest rate risk at commercial banks is potential losses which the bank shall bear when the market interest rate fluctuates. The interest rate risk is the risk of fluctuations in income and net value of the bank when the market interest rate changes. b. Types of interest rate risks: The interest rate risk consists of three types: Outright Risk, Yield Curve Risk and Basic Risk. c. Effects of the interest rate risk It affects the earning perspective of the bank. It also has effects over the market value of assets. 1.1.2.2. Exchange rate risk a. The concept of the exchange rate risk Foreign exchange risk is the current or future risk potential on income and capital due to adverse fluctuations in currency exchange rates. 7 Foreign exchange risk in this thesis consists mainly of exchange rate risk - which is the losses caused by the fluctuations of the exchange rate. b. Risk types in currency exchange business It includes operational risk; liquydity risk; settlement risk; market risk. c. Effects of exchange rate risk A bank with a large open foreign currency position is capable of coping with significant losses when the exchange rate changes. The bank is under the currency exchange risk when maintaining the open foreign exchange position (open position). 1.1.3. Market risk quantification According to the latest updated theories, the market risk quantification can be applied in accordance with four methods and basic criteria: (1) consequences of risks and (2) the probability of risks. Consequences and probability of risks are of two levels from the low to the high. With the two above criteria, the market risk quantification can be described in the following table: Table 1.1: Methods of market risk quantification Measurement methods Measurement Consequences 1. Interest rate gap Interest rate risk No Probabilit y No 2. The interest rate sensitivity (PVBP/Duration) Interest rate risk Yes No Exchange rate risk Yes No Interest rate risk and Exchange rate risk Yes Yes 3. Currency revaluation (mark to- market) 4. Value at risk (VaR) 1.2. The market risk management at commercial banks 1.2.1. Concepts The market risk management at commercial banks are the measures, operations affecting market risk, including measuring, identifying, 8 monitoring, controlling market risks of banks in order to minimize possible negative effects on the bank's earnings in the event of the market changes. In the aspect of operations, the market risk management is the application of financial instruments to limit or minimize financial loss caused by market risks. 1.2.2. Objectices of the market risk management 1.2.2.1. Minimizing losses for the bank One of the important objectives in the market risk management is to limit, to the maximum extent, any adverse effect of fluctuations in interest rates and exchange rates over the bank's income. Although interest rates, exchange rates change, banks always want to achieve their expected incomes at a relatively stable level. 1.2.2.2. Increasing profits for the bank In addition to minimizing losses caused by market risks, the bank can maximize its profits with the correct predictions about the volatility of interest rates, exchange rates in future. 1.2.3. Contents of the market risk management 1.2.3.1. The risk management model The standard risk management model can be referred and applied as follows: CEO Trading Operations Risk management Front office Middle office Back office Figure 1.1: Risk management model 9 Source: Consultation documents of ING The bank needs to build a model of risk management in accordance with business scale and features. However, in the modern business model there is still a clear bound of duty among three departments: business, risk management and operation in order to support and monitor each other. 1.2.3.2. Market risk management policy Market risk management policy is a system of limitations and documents on risk activities for the entire bank. Effective risk management rule needs to start with the highest level, which is the functions implemented by the Board of Directors and Executive Board. 1.2.3.3. Process of monetary risk management a. Risk identification Commercial banks need to set up a market risk management system to identify all the market risk source as well as to evaluate the fluctuation of interest, exchange rate… to the bank’s operation scope, to recognize and quantify the sources that cause the risks for the bank. b. Risk measurement: The bank can apply the market risk measurement techniques for both profit and economic values. Nowadays market risk measurement or quantification can be carried out by 4 methods: (1) Interest rate gap (2) Interest rate sensitivity (3) Revaluation of exchange rate (4) Value at risk (VaR), the content mentioned in the part of monetary risk quantification above. c. Risk monitoring and controlling The bank should consider if the present strategies are suitable with risk files as bank’s periodical expectation. Senior management board and the bank should build a report system which allows them to monitor current and potential risks to ensure the consistence with the proposed target. They also should set up and maintain an 10 effective controlling system. They need to check and update each step of the quantification process to guarantee the honesty and reasonability. 1.2.3.4. Limit management The market risk management limits include: Opening positions; Stoploss limits; Total book Limits; Counterparty Limits; Interest rate gaps limits, interest rate sensitivity Limits; Value at risk limits (VaR). 1.2.3.5. Using derivative products to avoid market risk We use derivative tools to change the risks. These derivatitve tools are: interest rate forward contract, foreign currency forward contract; interest rate swap, foreign currency swap; foreign currency option, interest rate option; future contracts. 1.2.4. Influential factors of market risk management in commercial banks Technology, professional qualification; legal environment and financial market development; forecasting system of market, interest and exchange rate. 1.3. EXPERIENCES OF MARKET RISK MANAGEMENT IN SEVERAL FOREIGN BANKS This thesis works on the experiences of these prestigious banks: KDB (The Korea Development bank) – Korea and Calyon Bank, Ho Chi Minh branch. On that basis it abstracts several lessons of market risk management: The advantages of these two banks’ market risk management methods are: (1) Apply advanced market risk management method, (2) Modern software with high expense, high trustworthy, (3) Methodical and standardized market risk management procedure, (4) market risk management with value at risk is the most popular method in these days. 11 12 CHAPTER 2 MARKET RISK MANAGEMENT IN VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE 2.1. Overview of Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) 2.1.1. Establishment and development of Vietnam Joint Stock Commercial Bank for Industry and Trade It is a state-owned bank which was founded in 1988, capitalized in 2008. With core product of bank services, Vietinbank has a banking network on the whole nation. The number of staff is above 18.000, which ranks the second of number in Vietnam bank system. Vietinbank is the official member of many prestige organizations. In the process of establishment and development, from a specialized bank, Vietinbank has been through many steps to reinforce its position of a big state-owned commercial bank in Vietnam. 2.1.2. Organizational structure The organizational structure of Vietinbank is described as below: Chart 2.1. Targeted operational model in period 2013 - 2015 HEAD OFFICE General Shareholders' Meeting Supervisory Board Board of Directors Auditing dept Committees Secretariat to the Board Compliance and Performance Auditing Dept - HR and Remuneration Committee - Assets and Liabilities management Committee - Risk Management Committee - Policy Committee - IT Development Strategy Committee Operational Monitoring and Auditing Dept Board of Management Credit Committee, Financial Institutions Committee Finance Division Risk ManagementDivision Human Resources Division Marketing Division Oferational Division Information Division Supporting Division Business Division Treasury & Capital Market Division Business Division BRANCHES/ AFFILIATES Branches Retail Bankin Division Retail Bankin Division International Trade Division Training center Vietinbank Southern Branch Dept Transaction office Middle Branch Affiliates Branches 13 Source: Vietinbank 2.1.3. Operation ability 2.1.3.1. Capital mobilization ability It is one of the banks that have strong capital resources. Up until 31/12/2012, mobilized funds amounted to 461 thousand billion VND, increasing 9.4% comparing with 2011 and accounting for 12% banking market shares. 2.1.3.2. Lending and investment ability Total assets until 31/12/2012 is 505 thousand billion VND, increased by 9.8% comparing with 2011, Vietinbank is always one of the commercial banks that own the largest asset scale in Vietnam banking system. In 2012, Vietinbank’s total loans and investments was 471 thousand billion VND, increased by 9.2% comparing with 2011. Table 2.1: Credit activities of Vietinbank (Unit: billion VND) Target 1. Short term loans 2. Medium and long term loans 3. Finance leasing 4. Other loans 2009 93.372 69.796 820 1.082 2010 141.377 93.660 1.222 1.864 2011 2012 176.605 200.363 113.596 131.571 200 0 6.733 0 Source: Financial statement of Vietinbank in 2009, 2010, 2011,2012 Investment portfolio’s on monetary market and capital market at the end of 2012 was 77.764 billion VND which was 16% of the total assets. Vietinbank is one of the biggest banks of lending and investment balance, having credit relationships with many Vietnam important banks of industrial, commercial, service fields and interbank market. 2.2. Real situation of market risk management of Vietinbank Vietinbank has established market risk management Board and asset - liability management committee (ALCO) to monitor and control thoroughly all kinds of business risks. 14 In 3/2006, Vietinbank established market risk management and operation Department to monitor the market and operation risk with main functions of building policies, procedures and warning systems for market and operation risks. In 3/12013, Vietinbank established a Risk Management Division toward the risk management activities . At the present, commodity and security risks are not popular with Vietnam commercial banks. Therefore, when working on issues of market risk management, this thesis only focus on 2 issues: interest rate risk management and foreign currency risk management. 2.2.1. Real situation of interest rate risk management 2.2.1.1. Interest rate policy and fluctuation from 2009 to 2012 2.2.1.2. Regulations and organization of interest rate risk management Vietinbank has built interest rate risk management policy with targets of limiting the loss of interest rate income, maintaining market value of owner’s capital, utilizing market interest rate fluctuation with restructuring balance sheet in order to maximize its profits in risk limits defined by bank’s risk appetile. The bank also sets up operation regulations of interest risk management which defines clearly the function and duty of each department from Board of directors to professional departments. In 2013, Vietinbank started to apply interest risk management regulations accordance with its business scale and activities. This creates good conditions to monitor and operate interest risk management effectively. The management model is described as below: 15 Board of Directors Board of Directors Risk Management Committee Supervisory Board ALCO General Director Board of Management Deputy General Director Deputy Departments Head of Risk Management Division Round 1 Round 2 Treasury & Capital Market Division Risk Management Division Round 3 Capital Management & Financial Planning Department Market risk Management Department Capital Market Financial Institutions Department Business deptTransaction Offices Department Credit Risk Operational Risk Management Management Department Department Internal Audit Dept Branches Figure 2.1. Interest rate risk management model of Vietinbank Source: Vietinbank 2.2.1.3. Interest rate risk management regulations of Vietnam Joint Stock Commercial Bank for Industry and Trade In 3/2013, Vietinbank set up regulations on interest rate risk management to define clearly function of business department (Front Office-FO), risk management (Middle Office-MO) and operation management (BO-Back Office), in interest rate risk management according to Basel 2 to monitor and minimize interest rate risk in business activities, define individual’s responsibility and works clearly. 2.2.1.4. Interest rate risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade Vietinbank manages the interest rate risks at two levels: transaction level and portfolio level, of which the former in more focused. 16 interest rate risk management at portfolio level - In 2012, Vietinbank completed the design, officially applied and continuously upgarted the software system of assets- liabilities management (ALM) to run to the transaction level under international practices, automatically report of term differences, revaluation under nominal term and behaviour, scenarios analysis reports on interest rate increase/decrease situation, etc in order to faciliate the Bank’s interest rate manegement activities . Asset - liability management system is now on trial and will be on operation in 2013. Re-pricing terms of all loans are required to be adjusted based on the repricing terms of fund mobilised and are controlled within establised limits by the bank. To 31/12/2012, cumulative interest rate gap/assets of all the terms as below: Chart 2.1: Cumulative interest rate gap 0 -2 -4 -6 -8 -10 -12 30/6 30/9 31/12 When the interest rate increases, Vietinbank will take risks of net profit decrease of all the terms. When the interest rate decreases Vietinbank’s profit will increase. In fact from 31/12/2012 to now the interest rate decreased. Interest risk management at transaction level 17 - All the credit contracts are required to include terms relating to interest rate risk prevention to ensure the Bank can hold initiative in coping with all the abnominal fluctuations of the market, lending interest rate must reflect the bank’s actual funding cost. - Management through the Fund Transfer Pricing (FTP). From 02/04/2011, Vietinbank has implemented the fund transfer pricing system (FTP) following term- matching principle for every single transaction in line with international practices. Depending on the orientation of the bank and market movements, the Head Office can change the fund price for each type of customers or products.. to give signals for each business unit to determine their lending fund/mobilization rate. 2.2.1.5. Using derivative products and forecasting interest rate fluctuation in Vietnam Joint Stock Commercial Bank for Industry and Trade Vietinbank has not used any derivative products to manage interest rate risk, because the deriative market in Vietnam has not been developed well. However it has a seperated department with main function of analyzing market information and propose their forcast each week, month, period... These judgements will be the foundation for the Board of managers to decide on interest rate risk management. 2.2.2. Real situation of foreign exchange risk management 2.2.2.1 Policy and fluctation of exchange rate from 2009 up to now 2.2.2.2. Model of foreign currency trading and exchange rate risk management in Vietinbank Foreign currency trading of Vietinbank is a focused management procedure from the Front office (trading department) to back office (business capital payment department), and middle office (risk management department)’s role as a risk controlling department and giving reports. Missions of FO, MO and BO are defined clearly to ensure transperancy and prevent conflict. Each department has to transact independently and cross check each other. FO does not implement the transaction payment, BO does not take direct transaction or write dealing slip. MO independently carries out the supervision of activities of FO. 18 2.2.2.3 Exchange rate risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade a. Management with foreign currency position Nowadays Vietinbank manages the foreign currency risk by foreign currency position limit. On the basis of State Bank’s foreign currency position regulation, Vietinbank builds and regulates foreign currency position for itself and its branches in each market period. Position limit is controlled and implemented by the capital market Department and monitored independently Market risk management department. Table 2.2: Foreign currency limits in bank branches Group Group 1 Group 2 Group 3 Group 4 Group 5 FOREIGN CURRENCY LIMITS IN BANK BRANCHES Maintained foreign currency position USD Other currencies converted to USD +/- 2,500,000.00 +/- 500,000.00 +/- 2,000,000.00 +/- 400,000.00 +/- 1,000,000.00 +/- 300,000.00 +/- 500,000.00 +/- 200,000.00 +/- 300,000.00 +/- 200,000.00  Regulations of transaction limits, loss limits with foreign currency trading in international foreign currency market: Table 2.3: Foreign currency position and transaction limits, loss limits FOREIGN CURRENCY POSITION AND TRANSACTION LIMITS Foreign currency Foreign currency Dealer’s name Transaction limit position in day position overnight A 1,000,000.00 500,000.00 1,000,000.00 B 1,000,000.00 500,000.00 1,000,000.00 C 750,000.00 500,000.00 750,000.00 LOSS LIMIT (Unit: USD) Dealer’s name Day Month Year A 3,500.00 5,500.00 14,000.00 B 3,000.00 5,000.00 14,000.00 C 2,000.00 4,000.00 8,000.00 Total loss limit 12,000.00 20,000.00 50,000.00 b. Foreign currency balance At Capital market Department of Vietinbank there is always foreign currency position because of circulating capital flows by foreign currency