Liquidity risk management at Vietnam Bank for Agriculture and Rural Development

Appendix 5

Market-based RRTK Index Analysis

Measuring based on the analysis of the market-based index of systemic liquidity (SLRI) is the method Severo (2012) built on the equilibrium/parity in the global financial market is broken and is an opportunity for investors to conduct arbitrage, this broken equilibrium is an indicator of volatility in the capital market in general and the stock market in particular. Severo believes that reallocating capital resources of investors when they discover that in their portfolio there are securities that can be substituted for each other but are traded at large price differences will help them limit risks while still ensuring high profitability. The price difference reflects: (i) That is the increase in transaction costs; (ii) The emergence of liquidity difficulties of investors. Therefore, when the equilibrium in the international capital market is broken, creating a large difference in the price of interchangeable financial assets, these are potential signs of liquidity risk for the entire system.

In summary, this method is determined based on standard statistical techniques and market data to consider arbitrage opportunities in some major financial markets. On the basis of identifying signs of banks having liquidity problems to detect the trend of RRTK in the banking system.

The measurement by market-based systematic RRTK index analysis method is calculated as follows:

Step 1: Calculate the price difference from 4 components including: (i) Covered Interest Rate Parity – CIP; (ii) CDS of corporate bonds and non-bank financial institutions, (iii) Prices of US government bonds (newly issued and those currently traded on the secondary market); (iv) Interest rate difference in swap contracts. From there, calculate the daily price difference between different asset groups traded on markets in different geographical areas.

Step 2: Analyze statistical factors, find the main factor causing fluctuations in the price difference of these asset groups to find the most similar part from the price differences. The most common part obtained from those price differences is the SLRI measurement index.

Step 3: Standardize SLRI by taking the difference between the daily SLRI indices and the average value of SLRI and then dividing the result by the standard deviation of the SLRI series.

Appendix 6

Daily and periodic RRTK management

RRTK Measurement

Liquidity gap

Banks should use measures (liquidity gaps) to assess the structure of the balance sheet, as well as forecast future cash flows and liquidity positions, including off-balance sheet risks (Reference: BCBS – Principles on Liquidity Risk Management and Monitoring - September 2008, Principle No. 5)

The following reports should be established: (i) Liquidity gap report; (ii) Liquidity supply and demand report; (iii) Solvency ratio tracking table; (iv) Solvency ratio calculation table for the next day; (v) Report: Status of implementation of solvency ratio in the next 7 days by currency; (vi) Report: Status of implementation of maximum ratio of short-term capital used for medium- and long-term lending;

The report includes expected cash flows of assets and liabilities at the Bank classified into time ranges: “Overnight”, “1 to 7 days”, “1 to 30 days”, “1 to 3 months”, “3 to 12 months”, “1 to 5 years”, “over 5 years” and undetermined.

The report is consulted when making decisions related to liquidity management and capital management. In addition, the Bank also uses daily liquidity indicators (solvency ratios) for daily liquidity management.

In addition, the Bank also prepares a daily cash flow forecast file for transactions in the interbank market. This report is also used to manage available capital - the daily balance of deposit accounts at the State Bank.

Cash flow forecast

Banks need to: (i) Prepare cash flow projections that include realistic assumptions about the behavior of key counterparties and conduct multi-dimensional analysis; (ii) Assess the “stability” of their funding sources. For example, factors that affect the “stability” of individual deposit products include size, interest rate sensitivity, and geographic location of depositors and deposit channels.

Assumptions on cash flow forecasts need to be built in a reasonable, appropriate manner,

are fully documented and periodically reviewed and approved.

(Reference: BCBS – Principles on Liquidity Risk Management and Supervision - September 2008, Principle No. 5)

Undisbursed credit commitments

For undrawn commitments such as letters of credit (LC) and financial guarantees, banks need to estimate the level of cash outflows under normal conditions as well as under

liquidity crisis. Similarly, liquidity problems can arise if banks rely too much on credit lines or guarantees provided by other institutions. (Reference: BCBS – Principles on Liquidity Risk Management and Supervision – September 2008, Principle 5)

Foreign exchange liquidity

Banks need to assess their total foreign currency liquidity needs and determine acceptable foreign currency spreads, by conducting a strategic analysis of the bank for each foreign currency in which it has significant exposure, and taking into account the potential impact during a crisis.

The extent of foreign exchange mismatches takes into account the following: (i) The bank's ability to raise funds in the foreign exchange market; (ii) The level of foreign exchange reserves in the domestic market; (iii) The ability to convert surplus currencies into deficit currencies, and between member units; (iv) The ability to convert major currencies held by the bank, taking into account the possibility of loss or the possibility of complete closure of the foreign exchange swap market for a certain foreign currency. (Reference: BCBS - Principles on Liquidity Risk Management and Supervision - September 2008, Principle No. 5).

Banks are required to prepare daily cash flow reports to assist competent authorities in making decisions regarding foreign currency liquidity management. Projected cash flows are assumed based on the Bank's experience, assessment and analysis.

Diversify capital mobilization sources

Banks need to: (i) develop a capital mobilization strategy that includes effective diversification of sources and mobilization terms; (ii) Regularly review and verify the selection of mobilization sources, thereby assessing the effectiveness of maintaining liquidity in the short, medium and long term (Reference: BCBS - Principles on Liquidity Risk Management and Monitoring - September 2008, Principle No. 7).

For transactions in the interbank market: The bank needs to have limits on counterparties in the interbank market; In addition, the bank also needs to monitor the deposit accounts of the two largest customers. The bank also needs to maintain close relationships with major funding sources/counterparties as well as with the Central Bank.

Intraday liquidity management

Banks need to: (i) Proactively manage intraday liquidity positions and intraday liquidity risks to promptly meet payment obligations under both crisis and normal conditions, thereby helping the bank's payment system to operate more effectively; (ii) Have policies, procedures and systems to support operational objectives in all financial markets and all currencies in which the bank has a large volume of payments and transactions.

The Bank's intraday liquidity management objectives should include the following: (i) Identifying and prioritizing important payment obligations and the specific timing to meet these obligations when necessary (e.g. obligations requiring settlement using other payment systems, obligations related to market operations such as money market transactions or clearing, and payments that are important to the Bank's business and reputation); (ii)

Pay other less important obligations as soon as possible. (Reference: BCBS – Principles on Liquidity Risk Management and Monitoring - September 2008, Principle No. 8)

Liquid assets

Banks need to: (i) Ensure the continued availability of high-quality, unrestricted liquid assets that banks can sell or pledge to raise capital in crisis situations; (ii) Ensure a “liquidity cushion” corresponding to established risk tolerance thresholds.

Issues to consider include: 1/ The magnitude of cash flow differences; 2/ The timing and severity of crises; 3/ The liquidation or collateral value of assets

For the components of the “liquidity cushion,” banks should hold the most reliable liquid assets such as cash and high-quality government bonds or similar instruments.

(Reference: BCBS – Principles on Liquidity Risk Management and Supervision - September 2008, Principle No. 12)

Early warning signs

Banks need to establish a set of early warning signs to identify signs of increased risk from liquidity risk positions or from potential funding needs of the Bank. Early warning signs can be qualitative or quantitative.

(Reference: BCBS – Principles on Liquidity Risk Management and Supervision - September 2008, Principle No. 5)

Stress Testing and Capital Provision Planning (CFP)

Banks need to: (i) Conduct stress testing regularly with general market or bank-specific crisis scenarios (can be conducted for each scenario or a combination of scenarios) to identify factors leading to liquidity loss and ensure that current risk levels are maintained within the bank's risk tolerance; (ii) Use the test results to adjust management strategies, policies and liquidity positions and develop emergency response plans. (Reference: BCBS - Principles on Liquidity Risk Management and Supervision - September 2008, Principle No. 10)

Liquidity Risk Monitoring and Reporting

Daily liquidity management

Banks should: (i) Set limits to control liquidity risk levels, vulnerabilities and regularly review limits and reporting procedures at corresponding levels; (ii) Use limits to manage liquidity on a daily basis in normal business conditions (e.g. MCO limits – Cash Outflow Limits). Limits should include measures to ensure the bank can continue to operate during a crisis. (Reference: BCBS – Principles on Liquidity Risk Management and Monitoring – September 2008, Principle No. 5)

Limits for each major currency

Internal limits may be established for each major currency to which the bank is exposed. Tighter limits should be established for currencies where convertibility into other currencies is not guaranteed, especially in crisis situations. (Reference: BCBS – Principles on Liquidity Risk Management and Supervision – September 2008, Principle 6)

Limits on the concentration of capital resources

Limits are set to monitor the concentration of capital raised according to:

(i) Partner; (ii) Secured source of capital; (iii) Type of instrument; (iv) Term; (v) Currency; (vi) Geographic market,… (Reference: BCBS – Principles on Liquidity Risk Management and Supervision - September 2008, Principle No. 7)

Reporting process to all levels

Banks should clearly specify thresholds and provide guidance on reporting procedures at different levels – a clear sequential reporting process from lower to higher levels. (Reference: BCBS – Principles on Liquidity Risk Management and Monitoring – September 2008, Principle No. 5).

The Board of Management should agree on a set of reporting criteria, specifying the scope, manner and frequency of reporting to different audiences (such as the ALCO) and the parties responsible for reporting to support liquidity risk monitoring. (Reference: BCBS – Principles on Liquidity Risk Management and Monitoring – September 2008, Principle 5).

Appendix 7

Research sample of 25 branches in the Agribank system

Code

Branch	Average total assets Period 2011-2016 (Billion VND)
1200	Exchange	19,207.99
1400	Lang Ha	13,334.59
1500	Hanoi	13,486.29
2000	Danang	10,784.42
2200	Ha Tay	21,938.74
2300	Hai Duong	12,987.61
2400	Hung Yen	7,925.63
2500	Bac Giang	12,455.74
2600	Bac Ninh	8,087.51
2700	Phu Tho	8,339.26
3200	Nam Dinh	9,041.10
3400	Peace	10,154.88
3500	Thanh Hoa	20,228.57
3600	Nghe An	17,364.13
3700	Ha Tinh	13,221.27
4200	Quang Nam	8,798.28
4800	Binh Thuan	11,074.83
5400	Lam Dong	7,441.08
5500	Binh Duong	16,978.24
5700	Tay Ninh	10,708.08
5900	Dong Nai	20,029.06
6600	Long An	12,495.54
6900	Tien Giang	11,096.15
8000	Quang Ninh	11,014.49
8500	Thai Nguyen	7,878.20
	Total sample	316,071.68
	Proportion in Agribank system (%)	45.78

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