Factors affecting liquidity risk of Vietnamese commercial banks

Net liquidity position = liquidity supply – liquidity demand

If the supply of liquidity is greater than the demand for liquidity, the bank is in a state of liquidity surplus and conversely, the bank is in a state of liquidity deficit. Equilibrium liquidity occurs when the supply of liquidity equals the demand for liquidity, but this is almost impossible in practice. A surplus or a shortfall both describe the imbalance of the bank. A liquidity surplus occurs when the economy is underperforming and lacks investment and business opportunities. A liquidity surplus also occurs when a bank lacks methods and access to markets and customers. Other causes of surplus include: banks do not exploit all profitable assets, or capital grows too quickly compared to the scale of operation and management ability.

Meanwhile, liquidity shortage is the fact that the bank does not have enough capital to operate. The consequences of liquidity shortage can cause more serious problems for the bank's survival and growth such as loss of business opportunities, loss of customers, loss of markets, and reduced customer satisfaction. public news…‌

1.2. Liquidity risk of commercial banks

1.2.1. The concept of commercial bank liquidity risk

In the banking business, liquidity is a specialized term that refers to the ability to meet the needs of available capital for business operations at all times such as deposit payment, loan disbursement. , make payment transfers, repay loans, business and tax expenses, pay dividends, etc. If a commercial bank loses its ability to meet these needs, it can be said that the commercial bank has fallen into a difficult situation. payment towel.

Liquidity risk is a type of risk that occurs in the event that a bank is insolvent, cannot convert assets into cash in time, or cannot borrow money.

borrowed to meet the requirements of payment contracts. 7 Bank liquidity risk is associated with a bank's ability to meet its obligations to its depositors as well as to convert deposits into cash when necessary and its function to maintain balance between cash flows and deposits. cash in and cash out. These cash flows are managed under the direction and control of the central bank, which ensures the availability of the monetary base necessary to sustain the growth of the bank.

Liquidity risk is the most important type of risk for commercial banks in particular and financial institutions in general. In fact, there are many cases where an economic organization has a lot of assets and very little debt, but it can completely go bankrupt due to the liquidity risk factor of the assets not being able to offset the solvency in a short time. there. At a milder level, this risk can cause difficulty or stop the business of that organization for a specific time.

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Based on the source of liquidity risk of commercial banks, liquidity risk can be classified into 3 groups:

Liquidity risk comes from liabilities: can arise when depositors withdraw money before maturity and when due, but commercial banks do not have available capital for payment. With a large and sudden withdrawal request, commercial banks have to borrow additional money in the money market, have to raise capital unexpectedly with outstanding costs, or sell assets to convert into capital. availability to meet payment needs. To meet immediate demand, commercial banks may have to sell assets at below-market prices or borrow at high interest rates to have the required amount of available capital.

Liquidity risk comes from assets: arising in connection with the performance of the bank's credit commitments to customers. In case the borrower requires the commercial bank to fulfill the credit commitments, the bank must ensure sufficient liquidity to meet the customer's demand otherwise the bank will face risks.

7 Nguyen Dang Don, Management of modern commercial banks, Phuong Dong Publishing House, 2010.

Similar to the risk arising from liabilities, commercial banks will have to raise new capital at high costs or sell assets at low prices.

Liquidity risk from off-balance sheet activities: Along with the strong development of financial derivatives, liquidity risk from off-balance sheet activities is also increasing. When extraordinary payment obligations occur such as guarantees, payment obligations on forward contracts, swaps or options contracts. When those contracts come to maturity, there will be a need for liquidity. At that time, commercial banks may face liquidity risk if they do not have a plan to prepare a timely source of liquidity, do not have assets that can be quickly or easily converted into cash, instruments that can be traded on the market. currency field.

1.2.2. Causes of liquidity risk of commercial banks

Experts in the field of finance and banking have pointed out 5 causes leading to risks in the liquidity of commercial banks in recent years.

- First: credit growth is too hot. Overheated credit growth of commercial banks accompanied by unreasonable investment structure, large focus on profit-driven real estate investment will generate high risks when the market freezes, creating maturity imbalance between assets and liabilities because the bank has used too much short-term capital for long-term loans. This has created a high liquidity risk for commercial banks.

- Second: forecasting and market analysis of Vietnamese commercial banks are still limited. Commercial banks also have the idea of relying too much on the state mechanism, while foreign banks, in addition to strictly complying with prudential ratios, regularly study and closely forecast market developments. Therefore, it has made provision for liquid capital and adjusted it in a timely manner, not being passive before market impacts.

- Third, the systematic linkage between commercial banks to ensure payment safety is still weak , creating unfair competition, pushing up interest rates, creating openings for customers to deposit money "to raise prices and increase interest rates." ” or withdraw money to transfer to other commercial banks, leading to weakening of the system's ability to cope with liquidity shortage.

- Fourth: liquidity management at commercial banks is not good . Due to the weak asset and debt management of commercial banks and the lack of effective management tools… The State Bank is also difficult to grasp with certainty the liquidity situation as well as the big change in the financial position. assets of each commercial bank to adjust its regulations.

- Fifth: from the customer side , this is considered as a group of reasons why it is difficult for banks to use market tools to effectively regulate the liquidity of banks. In the condition of asymmetric information and not yet transparent, some customers (including legal entities) withdrew money from this bank and moved to another bank, residents withdrew money to buy gold and dollars. The US to hoard… has increased the instability of the market, domestic and foreign currencies, making it difficult for customers who have been using deposit and borrowing services at banks.

In addition to the above reasons, there are many other reasons such as: foreign currency transactions at Vietnamese commercial banks mainly focus on one type of foreign currency, USD; Direct impacts from other types of risks in banking activities also have a significant impact on liquidity risk; the phenomenon of a number of state corporations and corporations transferring or withdrawing money in large volumes; Weakness in planning and management…

1.2.3. Impact of liquidity risk

Liquidity risk is the most dangerous risk of the bank, which is related to the survival of the bank. A bank operating normally must ensure its solvency, that is, it must meet the current payment needs,

future and unexpected payment needs. Once liquidity risk occurs, it affects not only the commercial banks themselves but also the whole economy and society.

1.2.3.1. For commercial bank operations

Firstly, if liquidity risk occurs, depending on the severity, commercial banks may have to bear:

- Convert liquid assets into cash at high cost.

- Access to the money market to raise capital with stricter conditions, such as collateral, high interest rates, no rollover of old debt, credit lines subject to frequent review frequently or denied loans.

- Operational stagnation leads to a decrease in income.

- Loss of reputation leads to loss of customers, especially traditional customers and regulatory agencies.

Second, in special cases, liquidity risk can push a bank to insolvency, which is a state on the brink of bankruptcy.

1.2.3.2. For the national financial system

When a bank loses liquidity, at a serious level pushing the bank to the brink of bankruptcy, it can cause a contagion effect, leading to the bankruptcy of a series of other commercial banks, threatening the stability of the bank. the entire commercial banking system, causing chaos leading to a crisis is inevitable.

1.3. Liquidity risk management

Liquidity risk management is the effective management of the liquidity structure (liquidity) of assets and good management of the portfolio structure of capital .

The nature of liquidity risk management activities in a bank can be summarized in the following two contents:

8 Assoc. Dr. Truong Quang Thong, CommercialBanking Administration, Finance Publishing House, 2010

First, there are very few times when the total supply equals the total demand for liquidity, so banks often face a liquidity deficit or surplus.

Second, liquidity and profitability are two quantities inversely proportional to each other. The more liquid an asset is, the lower its profitability will be and vice versa; a source of capital with high liquidity often has large mobilization costs, so it reduces profitability when used for lending.

Liquidity has a great sense of timing, in the sense that some liquidity requirements are instantaneous or near-instant. For example, a large deposit is due and the customer has no intention of maintaining this capital at the bank; then banks are forced to look for capital sources that can be used immediately such as loans from other credit institutions. In addition, seasonal and cyclical factors are also very important in forecasting long-term liquidity demand. Planning for these liquidity requirements will help the bank plan more sources to meet long-term liquidity needs than in the case of short-term liquidity needs.

1.4. The role of liquidity risk management‌

- Ensure liquidity for the bank.

- Helping banks easily access available capital sources at reasonable costs and at the right time.

Liquidity management is much more important today than in the past, because a bank can be shut down if it doesn't meet its liquidity needs even though it is technically still viable. pay. Furthermore, a bank's liquidity management capacity is an important measure of its overall effectiveness in achieving its long-term goals.

1.5. Measure liquidity risk‌

The measure of liquidity risk of commercial banks has been studied by many authors around the world for quite a long time. Accordingly, it can be assessed based on the bank's ability to meet capital requirements for its operations. Factors to consider include volatility of deposits, reliance on risk-sensitive capital, availability of assets that can be quickly converted to cash, ability to access to the money market, the overall effectiveness of the bank's debt and asset management strategies and policies, compliance with the bank's internal liquidity policies, content, and regulations scale and expected use of credit commitments... However, it is difficult to build a single measure to quantify or cover all factors of liquidity, capital adequacy, asset quality and profitability due to many differences in the size and operation of different banks, as well as the influence of regional, national and international market conditions. There is no one ratio that really covers the different aspects of liquidity for all banks of different sizes and types.

According to Peter Rose, author of “ Commercial Banking Management ”, in recent years, several liquidity risk measurement methods have been developed including: Liquidity source and utilization approach; liquidity supply and demand method; liquidity index method; funding gap method and some other methods 9 . Each of the above methods is built on a number of assumptions

The assumption is that a bank can only approximate the actual liquidity demand at a given time. That is why the liquidity manager should always be ready to adjust the estimate of the liquidity requirement each time the bank receives new information.

9 Vodova. P., (2013a), Determinants of Commercial Banks' Liquidity in Hungary, working paper

1.5.1. Liquidity source approach and use of liquidity‌

This method is based on the fact that: a bank's liquidity increases as deposits increase and lending decreases. Conversely, it decreases as deposits decrease and lending increases.

Whenever liquidity source and liquidity use are unequal, commercial banks face a liquidity gap. The main steps in this method include:

Step 1: Estimating loan demand and deposit volume during the bank's estimated liquidity position (planning period)

Step 2: Calculate the expected changes in lending and deposits during the planning period.

Step 3: Estimate the bank's net liquidity position by comparing the expected change in lending with the expected change in deposits.

One useful tool is the preparation of a net liquidity statement, which records all cash flows statistically reflecting the source of liquidity and the amount of money the bank has actually used to meet its liquidity needs.

1.5.2. Measure liquidity risk through liquidity indicators

Accordingly, the use of financial ratios is a way to estimate liquidity requirements based on experience and industry averages through research based on data on balance sheets of commercial banks. Each index represents an aspect of a bank's liquidity capacity.

Liquidity Ratio: Researched by Jim Pierce, this metric measures the potential loss when a bank must immediately sell its assets to meet liquidity needs at fair market prices of the bank's assets. Item is salable under normal conditions – it may take longer as the bank has to put it through auction and make it happen

a number of surveys and studies. The more the immediate sale price differs from the fair market price of the asset, the less liquid the bank's portfolio of assets will be.

The formula for measuring liquidity index is determined as follows:

I = [w i ×(P i /P * )]

In there:

I: liquidity index ranges from 0-1 w i : weight of class i assets

Pi : immediate selling price

P * : fair market price of the asset

In addition, the following indicators are also commonly used to measure bank liquidity:

Cash + deposits at other credit institutions

Cash position index = x 100%

total assets

Theoretically, the larger this ratio, the more likely the bank is to have instant liquidity to handle immediate cash needs. However, if this ratio is in fact too high, it will reduce the bank's profitability because cash or cash equivalent assets are often less profitable for the bank.

Liquid securities

● Liquidity stock index = x 100% Total assets

Liquid securities on the balance sheet include trading securities and investment securities available for sale. The higher the liquidity ratio, the lower the liquidity risk that the bank has to face.

Loan balance + Financial leasing

● Lending capacity index = x 100%

total assets

Since credits and finance leases are considered illiquid assets, the higher the "lending capacity" ratio, the higher the bank's liquidity risk, but also higher liquidity. high profit for the bank.

● Customer balance/deposit ratio: This indicator shows how much percentage of customer deposits the bank has used to provide credit. The lower this indicator, the higher the liquidity of the bank and vice versa.

1.5.3. Funding Gap Method‌

Bank liquidity managers are often interested in the following two items on the balance sheet: Average balance of core deposits (Core Deposit) and average balance of lines of credit. In the banking business, most assets will be financed by deposits, most of which are current deposits that can be withdrawn from the bank at any time, creating a loophole. liquidity for the bank, thereby creating liquidity risk. Conventional loans are illiquid, so large and unpredictable withdrawals can lead to a bank's loss of liquidity. The primary funding gap is the difference between the average of loans and the average of core deposits.

Formula for calculating funding gap:

Funding gap = Average total outstanding balance – Average total mobilized capital

This is the theoretical basis for the author to use the funding gap as the dependent variable in the research model in the following section.

1.6. Research model of factors affecting liquidity risk of commercial banks

1.6.1. Quantitative model based on liquidity indicators of commercial banks

In the study " Determining of Commercial Bank' Liquidity in the Czech Republic" by Vodová (2011), with the aim of determining the determinants of liquidity risk of commercial banks in the Czech Republic, the author has using a regression model of liquidity indicators by looking at specific banks and macroeconomic data for the period 2001-2009.

Liquidity ratios are balance sheet metrics that identify key liquidity trends. These ratios reflect the reality of liquidity management at commercial banks, which may involve organizing a highly liquid asset portfolio to support liquidity when needed (such as a cash holdings, government bonds, etc.) or holding a substantial amount of stable debt or maintaining credit flows with other financial institutions.

The quantitative model is built by the author as follows:

L1= Liquid assets/Total assets

Liquidity ratio L1 provides us with information about the ability of commercial banks to absorb liquidity shocks. As a general rule, an increased ratio of liquid assets to total assets increases a bank's ability to withstand liquidity shocks. However, a high ratio of liquid assets can reduce the efficiency of a bank's operations, so it is essential to optimize the relationship between liquidity and profitability.

L2=Liquid assets/(Deposits + Short-term debt)

The L2 liquidity ratio focuses on a bank's sensitivity to selected funding sources. Banks can meet their financial obligations (current assets are high enough to accommodate volatile needs) if the value of this ratio is 100% or more.

L3= Debt balance/Total assets

The L3 ratio measures the ratio of loans to total assets. The higher the ratio, the lower the bank liquidity.

L4= Outstanding balance/ (Deposits + Short-term grants)

The L4 ratio shows the relationship between liquid assets and liquid liabilities. Like the L3 ratio, an increase in this ratio reduces the bank's liquidity.

By analyzing the above liquidity ratios through regression of panel data collected from Czech commercial banks, the author has pointed out the factors affecting liquidity risk of Czech commercial banks.

1.6.2. Quantitative model based on funding gap

In the research paper: " Factors affecting liquidity risk of Vietnam's commercial banking system " by Truong Quang Thong (2013), the author used a liquidity risk measure called Khe. open funding . According to the research model, funding ” is measured by taking the difference between credits and deposits divided by total assets.

The author used the quantitative method with the proposed regression model for the study as follows:

In which the independent variables are determined including: Total asset size (SIZE)

Liquidity Reserve to Total Assets (LRA) Reliance on External Financing (EFD) Equity to Total Equity (ETA)

Loan-to-total assets (TLA) ratio

Provision for credit risks to total outstanding loans (LLPTL) Economic growth (GDP)

Inflation Change (INT)

CONCLUSION OF CHAPTER I‌

In Chapter I of the topic, the author systematized an overview of the factors affecting liquidity risk of commercial banks, thereby helping us to have an overview of liquidity risk. and the factors affecting liquidity risk that the author will analyze in the following section. Besides, Chapter I also gives an overview of the quantitative models that have been built by domestic and foreign authors, thereby serving as a theoretical basis for the author's analytical model in the following chapters.

CHAPTER II. THE SITUATION OF FACTORS AFFECTING LIQUIDITY RISK OF VIETNAM COMMERCIAL BANKS‌

2.1. Overview of the liquidity situation of Vietnam's commercial banking system in recent years

2.1.1 Overview of the operation of Vietnam's commercial banking system‌

Up to now, the system of commercial banks in Vietnam has developed quite strongly in terms of both quantity and quality: If in the early 1990s, in Vietnam, 4 SOCBs accounted for almost the entire market. For deposits and loans in Vietnam, so far, according to the State Bank of Vietnam (SBV), there are more than 100 banks operating in the country . Along with that is the establishment and operation of a series of financial companies and financial leasing companies, credit funds from central to local levels. It can be said that, with more than 20 years of implementing the economic renovation process, the system

The banking system and non-banking institutions have made a remarkable development, making great contributions to the socio-economic achievements of our country in recent years. Besides credit institutions, there is also the presence and growing presence of non-banking credit institutions. The number of non-banking financial institutions operating in the Vietnamese market frequently changes over time, and has increased significantly since the early 2000s. These financial institutions have been and are in existence. The competition is quite fierce with commercial banks in some fields of traditional banking services. It is a fact that the competition between financial institutions in the field of capital mobilization and lending is very fierce, making the credit environment in many periods very unstable.

10 www.vneconomy.vn