Current Status of Interest Rate Risk Management at Military Commercial Joint Stock Bank

maturity of funds. Control the revaluation term difference within the allowable range.

- Managing interest rate risk at the transaction level:

+ All credit contracts must have interest rate risk hedging provisions to ensure that banks are always proactive in the face of unusual market fluctuations. Lending interest rates must be built on the basis of accurately reflecting the bank's actual capital mobilization costs.

+ Operate through the internal capital trading tool FTP. From April 2, 2011, Vietinbank has deployed the internal capital transfer pricing system FTP matching the term according to international practice, buying and selling capital in detail for each transaction. Depending on the Bank's operational orientation and market developments, the Head Office can change the capital buying and selling price for each customer/product... to provide financial signals for business units to determine lending/mobilization interest rates for each transaction.

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Regarding the interest rate risk quantification model, Vietinbank is currently using the repricing model to measure interest rate risk in the system because the repricing model can be implemented relatively simply and does not require complex techniques.

Vietinbank is using on-balance sheet and off-balance sheet measures to prevent interest rate risks. In addition, Vietinbank has also implemented a balance and appropriate timing between lending and capital mobilization: proactively finding projects that are suitable in terms of lending and capital mobilization; diversifying deposit terms such as: no term, 1 month, 2 months... and corresponding loan terms. In addition, Vietinbank's interest rate management tools: In lending activities, due to the characteristics of mobilized capital being mainly for terms of 12 months or less, to avoid interest rate risks, all medium and long-term loan contracts are regulated by Vietinbank with floating interest rates, adjusted periodically every 1-3 months; All credit contracts must have interest rate risk hedging provisions to ensure that the Bank is always proactive in the face of unusual market fluctuations. Lending interest rates must be built on the basis of accurately reflecting the actual capital mobilization costs of the bank; Interest rates are managed through the internal capital purchase and sale price tool FTP. Off-balance sheet measures: Vietinbank mainly uses derivative instruments to hedge interest rate risks.

b) Experience in interest rate risk management at Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank)

The Bank has been building a risk management system according to international standards to minimize risks to the lowest level. The departments include: Risk Management Committee is a department established by the Bank's Board of Directors to advise the Board of Directors in

The approval of appropriate risk management policies and orientations for each period, including determining the ratios, limits/restrictions and risk acceptance levels of the Bank, periodically reporting and assessing the risk situation in the Bank's operations and proposing timely improvement measures. The Risk Management Committee is only responsible for advising the Board of Directors and is not authorized to make decisions related to risk management. In addition, there is the Asset and Liability Management Committee (ALCO), a department established by the General Director. The Chairman of ALCO is the General Director. The members of ALCO are key officials performing risk management tasks in the bank. ALCO is responsible for monitoring and managing all assets and liabilities in the Bank's consolidated and separate balance sheets to maximize profits and minimize losses arising from adverse market fluctuations; Manage liquidity risk; Operate interest rates and exchange rates appropriately. Within the scope of decentralization, ALCO is authorized to make decisions related to risk management. Below are the risk management departments at the Head Office: Depending on the actual situation in each period, the Board of Directors will decide to establish a number of departments at the Head Office with the tasks of credit risk management, market risk management and operational risk management. All of these departments belong to the Risk Management Block and are under the direct management of a Deputy General Director of the bank. The departments in charge of risk management at the Head Office are responsible for advising the General Director in managing activities related to risk management, including drafting guidance documents, business processes and specific directive policies appropriate to market situations, monitoring and evaluating risk management activities in general throughout the bank and in particular for each branch and affiliated unit, proposing implementation measures to improve the situation... Within the scope of the General Director's delegation, the Deputy General Director in charge of risk management and the Department Heads at the Head Office are authorized to make relevant decisions.

The Bank has established an interest rate risk management framework. The purpose of interest rate risk management is to ensure that the appropriate interest rate margin can cover the cost of capital of all operating units, while ensuring that this fluctuation range is within the allowable limit and consistent with the bank's strategy. The interest rate risk management framework is based on 5 basic principles: Strategy for interest rate risk, Identification of interest rate risk in Vietcombank's operations, Ability to measure interest rate margin for different maturities, Clear and mandatory operating limit system, Necessary information system for timely and accurate reporting of interest rate risk.

The Bank has implemented flexible and effective RRLS prevention measures, including on-balance sheet measures: regulating floating interest rates in medium and long-term loan contracts. This measure can limit RRLS in case of complex market fluctuations.

as in 2008. The bank also continuously monitors the situation of TSC and TSN daily to propose a plan to balance capital sources. In addition, the bank has also used a number of derivative financial instruments, such as interest rate swaps, options, and term interest rates.

All departments within the Bank that carry out activities that impact net interest income need to be fully aware of the RRLS strategy.

1.3.4.2. Lessons learned for Military Commercial Joint Stock Bank

Through studying the experience of interest rate risk management at commercial banks in Vietnam, we can draw the following conclusions about interest rate risk management for the Military Commercial Joint Stock Bank:

- Regarding interest rate risk management policy: Banks must have a clear interest rate risk management policy, including the interest rate risk management objective to limit losses in interest income for the bank, maintain the market value of equity, take advantage of interest rate fluctuations in the market along with the BTKTS structure to create profits for the bank. Banks must also have regulations on organizing activities in the field of interest rate risk management that clearly define the functions and tasks of each department in the bank, from the Board of Directors to specialized departments, as well as stipulate specific limits: VaR limit, Duration Gap limit, Repricing Gap limit. The policy of interest rate risk management is also reflected in the regulations on equity, equity ratio for all assets of the bank according to Basel II to ensure sufficient capital in case of loss.

- Regarding the QTRRLS process: The bank must also have a QTRRLS process, regulations on the RRLS management policy and procedures, with the aim of ensuring clear functions of the business department, risk management and operational management in RRLS management according to the Basel 2 agreement to control and minimize RRLS in the business process, clearly identify and divide the work and responsibilities of individuals and the Block Board in the RRLS management process. Another purpose of the RRLS management procedure is to unify the steps of implementing RRLS management, build a system of methods for measuring and managing RRLS in accordance with international practices, limit the expected loss of bank asset value from fluctuations in market interest rates through measuring and managing the value subject to RRLS.

- Regarding the use of derivative instruments to hedge interest rate risks: Banks can also use interest rate derivative instruments (interest rate forwards, interest rate swaps and interest rate options) and possibly currency derivative instruments to hedge interest rate risks, and can even be used for speculative profit-making.

- Forecasting and analyzing interest rate fluctuations: These comments will serve as the basis for the bank's Board of Directors to make decisions related to RRLS.

CONCLUSION OF CHAPTER 1

In business activities, commercial banks face many types of risks, one of the specific risks of commercial banks is interest rate risk. Interest rate risk occurs when there is a mismatch in the maturity of assets and liabilities. Interest rate risk causes fluctuations in the income and net worth of the bank when market interest rates change. Commercial banks cannot determine the interest rate themselves or predict with certainty the trend of interest rates, but can only adjust their operations according to interest rate fluctuations to achieve the desired goals. Therefore, commercial banks cannot ignore interest rate risk management.

Interest rate risk management in commercial banks needs to be organized into a specific process from the stages of organizing interest rate risk management; identifying interest rate risk; measuring interest rate risk and preventing interest rate risk. To effectively manage interest rate risk, each commercial bank needs to establish a specialized department to manage interest rate risk of the entire system. Commercial banks can use the repricing model and duration model to measure interest rate risk. And managers rely on the measurement results to propose the most effective interest rate risk prevention measures. Depending on the circumstances and management strategy, commercial banks choose interest rate risk prevention measures to achieve the highest efficiency: adjusting the asset-liability structure or off-balance sheet measures such as forward contracts, futures contracts, options contracts, interest rate swap contracts, etc.

CHAPTER 2: CURRENT STATUS OF INTEREST RATE RISK MANAGEMENT AT MILITARY JOINT STOCK COMMERCIAL BANK

2.1. GENERAL INTRODUCTION OF MILITARY JOINT STOCK COMMERCIAL BANK

2.1.1. History of formation and development

2.1.1.1. Formation and development process

- Military Commercial Joint Stock Bank (MB) was established with the initial goal of supporting military enterprises in doing business. The initial capital was less than 20 billion VND.

– very low compared to the scale of other banks at that time. With the idea of building a corporate financial institution and developing military enterprises, after 18 months of active preparation, on November 4, 1994: MILITARY COMMERCIAL JOINT STOCK BANK officially came into operation. Headquartered at No. 28, Dien Bien Phu, Hanoi.

- From 1995 to 2002, from the position of a small bank, MB laid the foundation for sustainable and stable development, becoming the only profitable bank during the Asian financial crisis in 1997. During this period, MB also marked its maturity and expanded its development scale by becoming a member of the interbank foreign exchange market (1997); Acquiring the Asean hotel with an area of nearly 10,000m2 (1999); Established the capital and currency trading department (1999), and in 2000, received the decision to establish Thang Long Securities Company - the predecessor of today's MBS and established the debt management & asset exploitation company (now MB AMC) in 2002. Closing this period, MB's development has gone beyond its original mission to become a financial institution that can meet the needs of most customer segments in Vietnam.

- From 2003 to 2010, MB began a restructuring plan for comprehensive development, market expansion and rapid, strong and sustainable development in the period of 2003 - 2008, with a vision to 2015. Expanding the field of operation according to the roadmap for developing a comprehensive financial product and service chain, providing the best support for customers by establishing Hanoi Securities Investment Fund Management Company (HFM), now MB Investment Fund Management Joint Stock Company (MB Capital) (2006). In particular, on the momentum of strong development, MB successfully increased its charter capital to 3,400 billion VND (2008) and 5,300 billion VND (2009). Closing the period 2003 - 2010, MB marked its development beyond national borders by establishing its first branch in Laos, officially opened on December 30, 2010.

- Period from 2011 to 2015: Based on the successes and experiences accumulated over the previous 15 years, MB began implementing the 2011-2015 development strategy with a vision to 2020 to consolidate all aspects of operations and goals.

putting MB in the TOP 3 leading joint stock commercial banks in Vietnam. The most obvious mark of MB in this period was the breakthrough to hold the top position for 4 consecutive years 2012, 2013, 2014 and 2015 in terms of business profit and operating efficiency compared to joint stock commercial banks not controlled by the State; being considered the fifth largest bank in Vietnam today. In 2015, the most typical events of MB cannot fail to mention 3 outstanding events: MB was awarded the title of Labor Hero; Merged with Song Da Finance Company (SDFC) and increased charter capital to 16,000 billion VND.

- From a Bank established with the initial goal of supporting the military's economic enterprises and having more than 25 employees, after 21 years of operation, MB has increased its charter capital to 16,000 billion VND, more than 6,800 employees and become one of the banks with a wide network of more than 230 domestic and foreign transaction points. The Bank's goal is to build a convenient bank with two pillars: leading risk management and a culture of providing services and fast execution towards customers. In which, interest rate risk management is also one of the Bank's top tasks.

- MB's orientation in the coming years is that MB is aiming to operate according to the MBgroup model with the parent company being the Military Commercial Joint Stock Bank and subsidiaries in the fields of securities, fund management, insurance, etc. Accordingly, the subsidiaries will take full advantage of the group's advantages and operate effectively in their business fields. In 2015, MBgroup will provide comprehensive financial, investment and insurance solutions to customers on the basis of maximally integrating products and services of member units in the group; at the same time, each main field of operation of subsidiaries in MBgroup will be satellites providing support products along with commercial bank services. Establish and stably operate two new companies, MB Life and Consumer Finance Company.

On that basis, the orientation for 2016 is: Increasing resource investment, increasing the Bank's comprehensive competitiveness and sustainable development, applying the best governance and risk management practices to promote business.

2.1.1.2. Organizational structure of Military Commercial Joint Stock Bank

Military Commercial Joint Stock Bank is gradually implementing the application of organizational models as well as corporate governance models according to the best international standards and practices today.

- Organize business segments according to unified customer segments in the entire MB system and according to the bank's specific business types in the financial market, including

The “Blocks”: Wholesale Banking (Business) Block; Retail Banking (Business) Block; and Capital and Currency Trading Block.

- Establish and organize support areas, including the following Blocks: Risk Management; Appraisal Block; Internal Control Inspection Block; Finance-Accounting Block; Operations Block; Network and Distribution Block; Information Technology Block.

- The special feature of the National Bank that is different from other banks today is that it has a Political Department. Training the masses, completing political tasks, building political capacity and solidarity to overcome difficulties are always the key tasks.

- At MB, each Block will have Deputy General Directors in charge and will be managed by Block Directors.

- Continue to gradually apply modern management models according to international standards. MB's management and administration organization model:

General meeting of shareholders

Internal audit agency

Board of Directors

Office of the Board of Directors

Investment Board

Board of Supervisors

control

High Level Committees

- Human Resources Committee

- QTRR Committee

- ALCO Committee

- Credit Committee

General Director

Internal Control Inspection Block

Human Resources Organization Block

Finance and Accounting Block

CEO Office

Risk Management Block

Strategy Implementation Office

Appraisal Block

Business Investment Department

Political Department

Basic Construction Department

Large Customer Block

Small and Medium Enterprises

Customer Block

Individual

Capital and currency trading block

Network and Distribution Block

Operations Block

Information Technology Block

Branch

2.1.2. Business activities of Military Commercial Joint Stock Bank in recent years

MB's consistent goal is to maintain a solid position in the top 5 commercial banks in Vietnam in the period of 2011 - 2015, with the vision of becoming a convenient bank, based on the operating model of a multi-functional financial group, competitive enough in the region and gradually reaching out to the international market. In 2014, MB continued to demonstrate the correct development strategy when it continued to be in the leading group of the financial - banking market for the third consecutive year. Profit and business efficiency indicators were all completed at the level of

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