TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT ii TÓM TẮT iv TABLE OF CONTENTS vi LIST OF FIGURES ix LIST OF TABLES x LIST OF ABBRIVIATIONS xii INTRODUCTION .1 CHAPTER 1: OVERVIEW OF LIQUIDITY RISK MANAGEMENT IN BANKS .2 1.1 Introduction of liquidity risk 1.2 Liquidity risk classification .3 1.3 International standards in management and supervision of liquidity risk 1.3.1 Basel’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 1.4 State bank of Vietnam’s regulations on liquidity risk management 12 1.4.1 Capital adequacy ratio – CAR 14 1.4.2 Credit limits .14 1.4.3 Limits on capital contribution and share purchase 16 1.4.4 Ratio of granted credit to mobilized capital 17 1.4.5 Solvency ratios 17 vi 1.5 Conformity of State bank of Vietnam’s regulations to the international standards in liquidity risk management 24 1.6 Lessons from other bank’s liquidity risk management process 25 1.5.1 Overview of liquidity risk management policy 26 1.5.2 Liquidity risk policy 26 CHAPTER 2: LIQUIDITY RISK MANAGEMENT 31 AT TECHCOMBANK 31 2.1 Techcombank overview 31 2.2 Process of Liquidity risk management at Techcombank 33 2.2.1 Liquidity risk measurement at Techcombank 33 2.2.2 BOD and BOM’s risk appetite on liquidity management at Techcombank 37 2.2.3 Techcombank’s liquidity risk management structure .37 2.2.4 Techcombank’s liquidity risk management flows 41 2.3 Assessments in liquidity risk management at Techcombank 70 2.3.1 Techcombank’s compliance toward Basel and SBV’s regulations 70 2.3.2 Strengths in liquidity risk managements 72 2.3.3 Weaknesses in liquidity risk management 77 CHAPTER 3: SOLUTIONS TO IMPROVE LIQUIDITY RISK MANAGEMENT AT TECHCOMBANK 80 3.1 Pursuing ambitious business strategy 80 3.2 Investing in information technology 82 3.3 Systemic document on liquidity risk management 83 3.4 Restructuring organization and developing HR 84 vii 3.5 Intelligent and flexible strategic in liquidity risk management 87 CONCLUSION 90 REFERENCES 91 viii LIST OF FIGURES Figure 2.1 Techcombank’s ALCO structure .38 Firgure 2.2 Techcombank’s Treasury structure under ALCO BSM 40 Firgure 2.3 Techcombank’s liquidity risk management process 42 ix LIST OF TABLES Table 1.1 Credit limits on debt to clients 14 Table 1.2 Credit limits on debt to related clients 15 Table 1.3 Limits on financial leasing 16 Table 1.4 Limits on capital contribution and share purchase 16 Table 1.5: Ratio of granted credit to mobilized capital 17 Table 1.6: Overnight solvency ratio report .19 Table 1.7: – days solvency ratio report 21 Table 2.1: Financial highlights of Techcombank (2008 – 2011) 31 Table 2.2: 1-7 days solvency ratio for each currency .34 Table 2.3: Overnight solvency ratio for each currency .35 Table 2.4: Capital Adequacy Ratio 36 Figure 2.1 Techcombank’s ALCO structure .38 Firgure 2.2 Techcombank’s Treasury structure under ALCO BSM 40 Firgure 2.3 Techcombank’s liquidity risk management process 42 Table 2.5: Daily cash flows report 43 Table 2.6: VND Liquidity gap analysis 45 Table 2.7: USD Liquidity gap analysis .50 Table 2.8: Techcombank’s Solvency limits 55 Table 2.9: Techcombank’s Solvency ratio report at 28 and 29 March 2012 55 Table 2.10: Forecast daily solvency ratios report .57 Table 2.11: Liquidity stress testing modeling 60 x Table 2.12: Techcombank’s Liquidity stress testing in specific crisis .62 Table 2.13: Techcombank’s Liquidity stress testing in local market crisis 66 Table 3.1: Techcombank’s 2012 plan .81 xi LIST OF ABBRIVIATIONS ALCO Assets and Liabilities Committee ALM Assets and Liabilities Management ARCO Audit and risk committee BSM Balance sheet management department CAR Capital Adequacy Ratio CB Corporate banking division CEO Chief Executive Officer CFP Contingency Funding Plan FI Financial institution division FTP Fund transfer pricing LCR Liquidity coverage ratio MCO Maximum Cumulative Outflows PFS Personal financial services S&D Sales and distribution division SBV State bank of Vietnam SME Small and medium enterprise Techcombank Viet Nam Technological and Commercial joint stock bank xii INTRODUCTION Risk is inherent in any business in general and in financial sector in particular It has become key focuses 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 stricter regulations to prevent financial institutions from liquidity difficulties Financial institutions’ managers also pay much more attention to liquidity issues to ensure banks’ 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 Vietnam has just issued regulations on prudential ratios in 2010 and series of its amendment right after The regulations affect immediately banks’ 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 how to respond to local regulations of SBV and step by step implement international acceptable practices Thesis studies case of Techcombank, one of most successful joint stock in Vietnam banking sector in the last decade Techcombank also is good example to make analysis because the bank has applied not only local regulations but also starting itself to set up internal requirements to reach international practices CHAPTER 1: OVERVIEW OF LIQUIDITY RISK MANAGEMENT IN BANKS 1.1 Introduction of liquidity risk Risk occurs in any business in general and in banking sector in particular It can be said that banks run business in the most “sensitive” environment with special product of money Risks are any events that may negative impact on the bank business It can be classified in four types of risk in banking sector They are credit risk, market risk, operations risk, and liquidity We almost know about the first three risks Credit risk is the risk that borrower fails to repay a loan or other contractual obligation at right time and right amount, while market risk occurs day to day according change in price of financial assets And finally, operation risk arises from execution of business functions, is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events They all three risks come directly from business But the last one is different, it is consequential risk It arises from underlying problems They can be endogenous or exogenous Endogenous problems are most often credit risk and, some times operation risk Exogenous problems are also result from market disruptions, sovereign downgrade and any other events that could impact bank’s business Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses This definition is broader than that concept that is only possession of cash or assets that can be readily converted into cash Liquidity risk management nowadays has become one of most challenging to any financial managers Understanding the term, risk classification and measurement that help managers well control the risk and lead business to achieve their targets and goals 1.2 Liquidity risk classification Liquidity risk could arise from internal or external factors And level of liquidity risk, as well as the quantity of the available sources of liquidity, varies, depending on circumstances and their duration In other words, specific circumstances define level of liquidity risk By understanding each specific circumstance, managers could sound understanding, measuring, and managing of liquidity risk According to best practice in the financial market, liquidity risk is classified into three categories, including: - Structural liquidity risk - Contingency liquidity risk - Market liquidity risk Structural liquidity risk refers to the liquidity risk in the bank’s current balance sheet structure due to maturity transformation in the cash flows of each individual position This also called mismatch risk that results from both contractually and behavior driven cash flows Contingency liquidity risk is the risk that future events may require a significantly larger amount of cash than a bank projects it will need It is the risk of not having sufficient funds to meet sudden and unexpected short term obligations Unexpected obligations can arise due to unusual deviations in the timing of cash flows or unexpected deposit withdrawals Market liquidity risk refers to the inability to sell assets at or near the fair value Market liquidity risk may arise when a market disruption impairs the bank’s ability to sell large positions or lower quality positions Market liquidity may also result from impaired access to the respective markets, for examples, after loss of reputation ... finally, operation risk arises from execution of business functions, is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events They all... risks come directly from business But the last one is different, it is consequential risk It arises from underlying problems They can be endogenous or exogenous Endogenous problems are most often... funding: Funding liabilitie s sourced from each significan t counterparty The bank'' s total balance sheet Funding liabilitie s sourced from each significan t product/instrument The bank'' s total