The documents issued by the State Bank in the coming time to guide the implementation of Basel II require commercial banks to have a strong change in awareness and significantly enhance their credit risk management capacity. Faced with this reality, a series of commercial banks have organized and will implement projects to comply with Basel standards on credit risk such as: projects on credit risk management organizational structure according to Basel standards; projects on credit risk management framework and data warehouse; projects on credit risk management methodology; projects on credit risk measurement and management solutions; projects on improving audit and internal control capacity according to Basel standards.
Second , on the application of achievements of the 4.0 technology revolution in credit risk management. On August 8, 2018, the Prime Minister issued Decision No. 986/QD-TTg approving the "Strategy for the development of the Vietnamese banking industry to 2025, with a vision to 2030", in which the Prime Minister directed the goals that the banking industry needs to achieve, especially the development of the system of credit institutions based on technology platforms, advanced banking management, in accordance with international operating standards. On that basis, the State Bank also issued the Plan for the application of information technology by credit institutions in the period of 2017 - 2020 with specific goals, roadmap and solutions. In particular, with credit risk management activities and risk management in general at commercial banks, the inevitable trend is to apply management methods that apply modern technology software and use multidimensional information systems as input databases. In that context, investment in developing data infrastructure, improving information technology level and training human resources is an urgent requirement for all commercial banks in Vietnam.
4.2. Solutions for Vietnamese commercial banks to improve loan portfolio risk management
4.2.1. On the organizational structure of loan portfolio risk management
Basis for proposed solution
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Faced with the current situation of the organizational structure for loan portfolio risk management in the program
3 of the thesis, an issue that needs to be improved at commercial banks is to increase the effectiveness of the “Three layers of defense” mechanism in credit risk management. Therefore, solutions to improve this mechanism are proposed based on the theory of credit risk management principles according to Basel II as well as the experience of the Korea Development Bank (KDB) shown in chapter 2.
In addition, according to the survey results in the thesis, currently most commercial banks in Vietnam have built a credit risk management structure according to a centralized model. This is considered a model with more advantages than the decentralized credit risk management model as clarified in chapter 2 of the thesis. However, from the experience of Citibank - USA and Japanese commercial banks referred to, there is still a need for solutions to apply the most suitable model of loan portfolio risk management organization in the actual conditions of current commercial banks in Vietnam.
Solution content
(i) Group of solutions to enhance the effectiveness of the “Three-layer defense” mechanism
Firstly , the internal policies and regulations of commercial banks need to clearly and consistently state the functions, tasks, powers and responsibilities for reporting the results of credit risk management of each department: business units, credit risk management department and internal control department. These regulations need to be issued in a way that avoids duplication of tasks and powers between defense layers and provides mandatory cross-reporting between defense layers or decides on a highly competent unit in commercial banks to be the focal point for receiving periodic reports on credit risk management issued at defense layers.
Second, every department in a commercial bank needs to build its own “Risk Management Culture”. The risk management model according to the three-line defense structure at the bank is a safety standard that helps the bank comply with and gradually approach advanced management standards in the world, especially, creating a culture of awareness and risk control in each employee of the bank. Each individual, from customer service specialist
From the staff of the support units, they must comply with regulations and procedures and be aware of the responsibility to assess, detect risks early and find ways to prevent risks from arising. "Risk management culture" means that credit risk management must be carried out by the entire banking system, not just the responsibility of the risk management unit.
Third , it is necessary to improve the effectiveness of the internal control department at commercial banks in the "Three layers of defense" mechanism. In reality, maintaining the independence and effectiveness of the internal control department at commercial banks is not easy because this department, together with the business and risk management departments at commercial banks, are still bound by interests. Therefore, making completely objective assessments, risk warnings and actions of internal control is almost very difficult to implement at Vietnamese commercial banks today. To limit this problem, the prerequisite that commercial banks need to implement is to completely separate the interests of the Internal Control Board from the authority and responsibility of the Executive Board as well as the Risk Management Division. In addition, for commercial banks with weak risk management capacity, the State Bank can send staff to participate in the Internal Control Board of commercial banks to enhance objectivity and transparency in assessment and supervision.
(ii) Group of solutions on choosing a model for organizing loan portfolio risk management
In theory, there are many advantages of the centralized risk management model, however, this is not the most suitable model for all commercial banks in Vietnam. Choosing the most suitable risk management organization model should be based on the following factors:
Bank lending development strategy: customer segmentation, risk appetite, focus on expanding market share or maximizing profits, focus on increasing service quality or competing on lending interest rates
Bank capacity in terms of human resources, technology, finance
The organizational model that is built should aim for three goals: low risk, high efficiency and customer satisfaction. Depending on the stage of development
development, each bank places different importance on different goals, so the organizational model of credit risk management may vary.
In addition, commercial banks need to pay attention when choosing a risk management model to avoid the following cases:
Mechanically applying models learned from foreign experiences without considering their suitability to the realities of commercial banks and the characteristics of the credit market in Vietnam.
There is no clear lending strategy, the model has been changed, or in other words, the model is not established based on strategy.
Changing the risk management model too quickly and hastily without fully preparing the conditions to be able to operate the model.
If commercial banks choose the wrong type of credit risk management model, it will lead to increased risks, banks may suffer financial losses or lose customers, reduce service quality... Thus, in the current practical conditions, Vietnamese commercial banks can choose three types of loan portfolio risk management models including: centralized model, decentralized model, conversion model (combined model) to best suit.
4.2.2. On identifying loan portfolio risks
Basis for proposed solution
As for the limitations mentioned in chapter 3 in applying EWS to identify credit risks in practice at Vietnamese commercial banks, the thesis offers solutions to improve this system, especially in building indicators used in early warning of risks based on the learning experience at Japanese commercial banks and Citibank - USA as pointed out in chapter 2.
Solution content
Firstly , Group 2 commercial banks need to have a quick roadmap to build and apply the EWS system in practice in managing loan portfolio risks. These commercial banks can refer to the implementation model at similar commercial banks that have completed the project.
Establish and operate the EWS system in practice, prepare financial and human resources conditions to meet the operational requirements of this system.
Second , both groups of commercial banks need to improve the EWS system in the direction of diversifying the indicators used in early warning of credit risks, especially the indicators for the group of corporate customers, and at the same time need to use more indicators that can be automatically calculated and updated according to the financial situation of customers continuously over time. In addition, from the experience of Japanese commercial banks, Vietnamese commercial banks can add more macroeconomic indicators or indicators on the credit quality of the commercial bank system to give early warnings about systemic risks, because these risks will then affect the loan portfolio of each commercial bank. In addition, the experience of risk management at Citibank - USA also suggests the introduction of a separate system to monitor bad debts, because these are loans with the highest potential risk of credit loss. This system should be maintained in parallel with EWS and should focus on post-lending monitoring and processing tools.
Third , to improve the quality of credit risk identification and meet international standards on risk management, commercial banks in both groups, especially group 1 commercial banks, need to promote the use of modern statistical methods such as Migration analysis, Vintage analysis... through investing resources to improve technology level and training qualified personnel to analyze and use software.
4.2.3. On measuring loan portfolio risk
Basis for proposed solution
The author proposes solutions for measuring loan portfolio risks at Vietnamese commercial banks for each group of commercial banks due to differences in the level of development and application of risk quantification methods at these two groups of commercial banks as clarified in Chapter 3. Accordingly, group 2 commercial banks need to focus on improving the applicability of risk measurement results in managing loan portfolio risks in practice. In addition, commercial banks in both groups need to improve the use of
Apply modern risk quantification methods such as the AIRB method according to Basel II and a group of methods for forecasting the quality of future loan portfolios. The completion of risk measurement methods is based on the requirements of credit risk management principles according to Basel II and the theoretical foundation of each method as presented in Chapter 2, aiming to apply modern methods according to trends at commercial banks around the world such as the experience of the Korea Development Bank (KDB) and in accordance with the legal regulations of the State Bank as well as the current conditions of Vietnamese commercial banks.
Solution content
General solution group for commercial banks
(i) On the use of credit risk measurement methods according to Basel II recommendations
Firstly , on the factor of default correlation between loans. Currently, according to the two SA and FIRB methods, Vietnamese commercial banks only stop at measuring the risk for each individual loan, ignoring the correlation between loans in the portfolio. Thus, the calculated loss results do not take into account the benefits of credit risk management through diversifying the loan portfolio. Therefore, commercial banks need to build tools to include the factor of default risk correlation between loans in the calculation of credit risk.
Second , about the internal credit rating system. If commercial banks apply the IRB method, the internal credit rating system is an important basis for risk calculation. According to Basel II, 11 groups of requirements for commercial banks to be able to apply the IRB method include: (a) composition of minimum requirements, (b) compliance with minimum requirements, (c) design of the rating system, (d) operations of the risk rating system, (e) corporate governance and control, (f) use of internal assessment, (g) risk mitigation, (h) validity of internal assessment, (i) verification of internal estimates, (j) consideration of capital costs for capital risks, (k) requirements for transparency . In which, the requirements for the validity of internal assessment include: method,
processes, control measures, data collection and information technology systems to support credit risk assessment, internal risk assessment, risk assessment and expected loss. However, this requirement has not been fully and uniformly implemented at commercial banks in Vietnam, and some commercial banks still assign borrowers an inaccurate rating to minimize capital requirements as prescribed. Therefore, to apply the IRB method, commercial banks need to demonstrate that the internal rating system has complied with the minimum requirements and is reliable. To do this, commercial banks need to perform the following tasks to improve the current internal credit rating system:
First, the system requires two separate assessments: of the credit risk of the borrower and of each loan (with its own characteristics).
Second, risk categories need to be divided into levels to assess both the borrower's ability to repay and the level of financing for the loan (debt group).
Third , the criteria used in this credit rating need to be detailed and complete to allow third parties to easily understand the decision when evaluating (for example, banking inspection and supervision agencies, independent auditing units). In addition, the criteria used also need to be consistent with the bank's internal lending policies and standards, suitable for the specific characteristics of each customer group and should diversify both qualitative and quantitative criteria. Third , banks applying the SA or IRB method need to regularly compare the actual PD ratio with the expected figure at each rating level and need to demonstrate that the actual PD ratio is within the expected range for that rating level. Furthermore, commercial banks using the IRB method must perform the above analysis for both EAD and LGD. This comparison should use historical data over as long a period as possible, and the methods and data for comparison should be clearly documented by the bank.
in writing and the bank should update the analysis and data at least once a year.
Fourth , regarding the selection of the most suitable method for Vietnamese commercial banks among the three methods recommended by Basel II, namely SA, FIRB and AIRB. The current situation at Vietnamese commercial banks shows the feasibility of applying each of the above methods as follows:
Firstly, with the SA method: this is the simplest method of the three methods above, however, in Vietnam there is currently no credit rating organization operating effectively. If using data from reputable international rating organizations such as SP, Moody's or Fitch, only very few customers in Vietnam are rated. Thus, for customers who are not rated, the standard risk level is very high, greatly affecting the level of equity that commercial banks need to maintain.
Second, with the FIRB method: this is the method that can be considered the most feasible to apply at Vietnamese commercial banks today to ensure that the measurement of credit risk gives accurate results with the actual state of banking operations, thereby helping commercial banks save capital costs, while also being suitable for the current conditions of commercial banks in terms of human resources, finance or technology.
Third, with the AIRB method: this method requires a great capacity of the commercial bank in terms of human resources and financial resources, which very few commercial banks in Vietnam currently possess. In the world, only large-scale commercial banks apply this method. In addition, the State Bank of Vietnam currently does not have any legal documents guiding the implementation of this method, so it will be a great difficulty for commercial banks if implemented.
Below, the author will simulate the implementation of measuring loan portfolio risk at commercial banks according to the FIRB method of Basel II as follows:
At the simple level of the Basel II FIRB approach, the default of a