Common Issues on Bank Liquidity Risk

period 2011-2016.

- The thesis also inherits and applies some research results of scientific works related to the research content to deepen the arguments in the thesis topic.

- An important new point of the thesis is the use of econometric models to assess the liquidity risk of Agribank. Based on the suggestion of Saunders and Cornett (2006), the thesis uses the method of estimating liquidity risk through funding gaps. When studying the liquidity situation of Agribank, because the scale of operations of the branches in the bank is very large, often equivalent to a commercial bank, the thesis will assess the level of liquidity risk at 25 branches, thereby allowing the estimation of the level of liquidity risk of the entire system. To determine the factors affecting liquidity risk, the thesis selects variables based on Chung's model (2009), then adds or removes some variables to suit the situation in Vietnam in general as well as at Agribank in particular [124], [89].

The thesis uses the panel data analysis method with data series that change over time (6 years, from 2011-2016) and space (25 branches of Agribank). There are three popular panel data approaches: Pooled OLS, FEM and REM. Pooled OLS is a panel data approach by stacking all observations together, ignoring the spatial and temporal dimensions and estimating only by the normal OLS model, so the regression coefficients are and are assumed to be the same for all observations. FEM helps to separate the effects of individual characteristics from the independent variables to estimate the real effects of the independent variables on the dependent variable. This means that when considering the effects of space and time, the intercepts will change differently for each Branch. However, because the data series used in the thesis is short in time, using this approach can also cause the model estimates to be biased.

Maybe you are interested!

REM assumes that the individual characteristics between Branches are assumed to be random. In addition, this model may lack variables, which may result in inaccurate estimates.

While Chung (2009) used the FEM model to explain the results, due to the limitations of the model, this thesis will regress all three models Pooled OLS, FEM and REM - then test the appropriateness between the Pooled OLS model and the REM model based on the Breusch-Pagan test [89].

The system of variables used in the model includes macroeconomic variables and internal bank variables. The variables belonging to the objective factor group include GDP growth rate (%), inflation rate (%) and M2 money supply growth rate in the period 2011-2016, which are synthesized by the Thesis from the World Bank website and data reports of the General Statistics Office.

The group of subjective factors affecting FGAPR liquidity risk was compiled by the author from the audited financial statements of 25 branches of Agribank nationwide in the period 2011-2016. In general, the scale of many Agribank branches is quite large, possibly equivalent to the scale of some domestic commercial banks. The calculation of indicators to serve the research topic was compiled from Agribank's financial statements. In general, the data source for quantitative research within the scope of the thesis is reliable.

6. Contributions of the topic

Firstly , systematize and clarify theoretical issues related to risk management in the context of international integration. In which, the outstanding new points of the topic in terms of theory are the synthesis of modern risk management models in banks. At the same time, the thesis also presented 6 methods of risk measurement. These are methods containing precise mathematical and econometric content that can be applied in practice.

Second, systematically study the experiences of other countries on risk management from a number of domestic and foreign commercial banks, thereby drawing valuable lessons that Agribank can study and apply in risk management in the current conditions of regional and international financial integration.

Third, systematically analyze the current status of risk management at Agribank during the period.

period 2009 - 2016, thereby pointing out the results achieved and the remaining problems.

limitations and causes of limitations in risk management. The thesis used 8 indicators to evaluate risk management of Agribank in the period 2011-2016. This is a success that no other thesis has achieved. At the same time, the author also used an econometric model to quantify risk management of Agribank branches.

Fourthly, based on the business orientations of Agribank, forecasts of the macroeconomic environment and perspectives on risk management in banks, the thesis has proposed a system of groups of solutions and recommendations for risk management at Agribank in the coming time. The solutions are based on a full scientific and practical basis, have a strong impact on the balance of sources and capital needs, and are completely suitable for risk management of commercial banks.

7. Structure of the Thesis

In addition to the introduction and conclusion, the thesis is divided into 03 chapters: Chapter 1: Theoretical basis of risk management in commercial banks.

Chapter 2: Current status of risk management at Vietnam Bank for Agriculture and Rural Development.

Chapter 3: Risk management solutions at the Bank for Agriculture and Rural Development of Vietnam.

CHAPTER 1

THEORETICAL BASIS OF LIQUIDITY RISK MANAGEMENT OF COMMERCIAL BANKS

1.1. GENERAL ISSUES ON BANK LIQUIDITY RISK

1.1.1. Concept of liquidity risk

1.1.1.1. Risks in banking operations

There are different views on risk depending on how one approaches the problem:

According to the traditional school, risk is considered as bad luck, loss, danger, something bad that happens unexpectedly. It is the loss of assets or the decrease in actual profits compared to expected profits. Risk is also understood as unexpected uncertainties that occur in the business and production process of an enterprise, negatively affecting the existence and development of an enterprise. In short, according to this point of view, risk is the possibility of damage, loss, danger or factors related to danger, difficulty or uncertainty that can happen to people.

According to the modern school, risk is a measurable uncertainty, both positive and negative. Risk can bring loss to people but can also bring benefits and opportunities. If people actively study risks, they can find preventive measures, limit negative risks, and welcome opportunities that bring good results for the future [142].

Thus, in the most general understanding, risks are events that occur beyond human control. Risks always cause unwanted consequences to life and finances.

Risks in banking operations can be understood as the risk and potential loss that commercial banks must bear in connection with their business operations. These losses can be in the form of capital loss, capital stagnation, and capital conversion (low liquidity of investment portfolios).

There are many different ways to approach risks in banking, but they can be approached from two main perspectives: intrinsic risks and systemic risks.

Internal risks include: credit risk, liquidity risk, interest rate risk, exchange rate risk, and bankruptcy risk.

Systemic risks include: inflation risk, technological risk, risk of changing legal environment, economic cycle risk, and fluctuations in market factors.

1.1.1.2. Liquidity of commercial banks

In finance, the term “liquidity” is used in many different contexts. From an asset perspective, liquidity is understood as the ability of an asset to be converted into money and vice versa. An asset is considered liquid when it meets the following criteria: Available quantity to buy or sell, available trading market, available trading time, reasonable price. According to Peter (2004), an asset is highly liquid if it satisfies two characteristics at the same time: there is a trading market to convert the asset into money and; has a relatively stable price, not affected by the quantity and time of the transaction [117].

Thus, the liquidity of an asset is measured through the time and cost to convert the asset into cash. Highly liquid assets are assets that can be converted into cash quickly and at low cost.

According to the BIS (2013) “Liquidity is the ability of a bank to both increase its assets and meet its debt obligations when they fall due without incurring excessive losses” [80].

From there, the most basic definition of liquidity would be: “Liquidity represents the ability of a bank to fulfill all payment obligations when due (to the maximum extent) and in the specified currency. Because it is performed in cash, liquidity is only related to cash flows. Failure to fulfill payment obligations will lead to a lack of liquidity.”

The liquidity problem only appears when the bank is faced with the demand for withdrawal from customers. At that time, the bank is not only concerned with balancing the demand for withdrawal with the current amount of money, but also with the ability to mobilize capital in the future. Therefore, the assessment of the bank's liquidity must be viewed in a dynamic state, that is, it must be considered in the correlation between the supply and demand of the bank's available capital in each certain period.

Liquidity supply is the amount of money that is available or can be had in the short term to

banks use. This cash inflow is created from the following sources:

- Deposits will be received

- Income from providing services

- Credits will be collected

- Sale of assets in business and use

- Borrowing from the money market

The demand for liquidity reflects the need to withdraw money from banks at times of

different points. This need depends on the following factors:

- Customers withdraw deposits

- Customer loan request

- Payment of other payables

- Costs for the process of creating banking products and services

- Dividend payment to shareholders

Net liquidity position (NLP) is calculated by the following formula: NLP = ∑liquidity supply - ∑liquidity demand

Thus, the net liquidity position is the difference between the total supply and the total demand for liquidity at a given point in time. If the demand for liquidity exceeds the supply of liquidity, the bank will face a liquidity deficit, meaning that the bank is short of money to pay. To continue to exist, the bank must determine from which source and at what cost to add liquidity to help the bank return to a state of liquidity equilibrium. Conversely, the situation of excess supply of liquidity

Liquidity surplus can also cause losses to banks because banks have excess reserves that do not generate interest.

1.1.1.3. Bank liquidity risk

There are many concepts about RRTK. Specifically:

RRTK is a type of risk when the bank is unable to provide enough cash for immediate payment needs, or provide enough liquidity at high or too high a cost [24].

RRTK can be understood as the risk when a commercial bank is unable to pay at a certain point in time, or has to mobilize capital sources at high costs to meet payment needs, or due to other subjective reasons, the commercial bank loses its ability to pay, which will lead to undesirable consequences [43].

RRTS occur when an organization is unable to finance increases in assets and meet payment obligations as they fall due without disrupting day-to-day business operations and without impacting its financial position [67].

From the perspective of bank liquidity management, the state of high or low liquidity risk describes the imbalance of the bank. The case of liquidity surplus, i.e. low liquidity risk, occurs when the economy operates inefficiently, lacks business or investment opportunities, commercial banks lack methods and capabilities to approach customers and markets, do not fully exploit profitable assets, capital sources grow too quickly compared to the scale of operations and management capacity. In the case of high liquidity risk - occurring when the bank does not have enough operating capital, it will cause serious problems for the existence and development of the bank such as loss of business opportunities, loss of customers, loss of market, and loss of public trust [50].

Thus, it can be seen that there are many different approaches to liquidity risk, but they all agree that liquidity risk arises from a situation where the bank does not have enough available capital at the time the bank needs to meet liquidity needs. When liquidity risk occurs, it causes financial and reputational losses for the bank.

In the most general way, it can be understood that: RRTK is the potential financial and brand losses that may occur due to the bank's inability or inability to fulfill its payment obligations and make payments fully and on time as committed.

Risk is not an isolated risk like market risk or credit risk, but a consequential risk, because in addition to specific causes, risk can also originate and change negatively under the impact of other non-financial risks and financial risks in banking operations.

Although there are many different ways to define RRTK, in any definition or concept, RRTK is always affirmed as a loss that occurs to the bank. This is the most important risk for an economic organization, especially a bank. At a severe level, it can cause bankruptcy because the assets cannot compensate for the payment capacity at that time. At a milder level, this risk can cause difficulties or stagnation in the business activities of that organization at a specific time. In general, this situation has a negative impact on the reputation, income and final payment capacity of the commercial bank.

1.1.2. Types of bank liquidity risks

There are many different ways to classify RRTK based on structure or capital sources, however, most studies agree on the approach to classifying capital RRTK and market RRTK.

1.1.2.1. Capital liquidity risk

According to BCBS (2006), “Capital risk is the risk that a financial institution is unable to find sufficient capital to meet its obligations as they come due without disrupting its daily operations and without impacting its financial position” [71].

According to IMF (2010), “Capital risk is the possibility that a financial intermediary cannot meet its debt obligations when they fall due” [108].

Comment