MINISTRY OF EDUCATION
AND TRAINING
THE STATE BANK OF VIETNMAM
THE BANKING ACADEMY
HOANG XUAN PHONG
HOANG XUAN PHONG
MARKET RISK MANAGEMENT
AT VIETNAM JOINT STOCK COMMERCIAL
BANK FOR INDUSTRY AND TRADE

FIELD OF RESEARCH: FINANCE – BANKING
CODE: 62.34.02.01

SUMMARY OF
DOCTORAL DISSERTATION
HA NOI - 2014
The dissertation is completed at: The Banking Academy
Instructors: 1. Assoc. Prof., PhD. To Ngoc Hung
2. PhD. Hoang Viet Trung
Opponent 1:
Opponent 2:
Opponent 3:
The doctoral dissertation has been defended to the
institutional level Jury at The Banking Academy
At: ………… of………April 2014
The thesis can be found at the library of The Banking
Academy and National Library of Vietnam.
3
INTRODUCTION
1. The necessity of the project
After the access into the World Trade Organization (WTO), the

and Trade has adopted a number of policies on minimizing the market
risks in order to be able to stand strongly in the competition and
determined to implement its strategies of building Vietnam Joint Stock
Commercial Bank for Industry and Trade into a powerful financial
conglomerate of Vietnam, the region and the world. However, under the
current volatile economic environment conditions, interest rates and
exchange rates , which have been changing constantly and
unpredictably at various times, have brought considerable damages to the
bank. Also, due to lacking experiences, comprehensive views, socio-
economic conditions, and the application of market risk management
standards in accordance with current international standards into
activities of the commercial banks in Vietnam in general and of Vietnam
Joint Stock Commercial Bank for Industry and Trade in particular is a
very difficult issue and should be further discussed and clarified.
From the theoretical and practical issues, I have choose the
project titled: “ Market risk management at Vietnam Joint Stock
Commercial Bank for Industry and Trade” in order to study and
defend my doctoral dissertation.
2. Research situation
So far, there have been many scientific research projects regarding
the risk management at commercial banks such as Hennie van Greuing
and Sonia Brajovic Bratanovic with the research named “ANALYZING
AND MANAGING BANKING RISK” 2003. In their research, authors
have mainly demonstrated the method of quantifying the market risks
with the Value At Risk (VAR) techniques. Methods of calculating VAR
include: Historical Method, The Variance-Covariance Method and
Monte Carlo Simulation. Currently, there has been no project on the in-
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depth research of this issue in Vietnam, however, it should mention the
master thesis of Du Thi Minh “Managing exchange rate risk in forex

comprehensively studied contents of market risk management at banks as
theoretical basis for assessing the actual situation and proposing solutions
to improving capacities of market risk management at Vietnam Joint
Stock Commercial Bank for Industry and Trade.
3. Dissertation objectives
On the basis of clarifying the general theoretical issues about market
risk, methods of identifying, measuring and controlling market risk, the
system of market risk management softwares at commercial banks;
analyzing and evaluating the status quo of the market risk management in
Vietnam Joint Stock Commercial Bank for Industry and Trade; the thesis
proposed solutions to improving market risk management ability at
Vietnam Joint Stock Commercial Bank for Industry and Trade in
accordance with international practices.
4. Research subjects and scope
- Research subjects of the dissertation: The theoretical and practical
issues about market risks and market risk management at commercial banks.
- Research scope: Managing market risk (including interest rate risk
and exchange rate risk) at Vietnam Joint Stock Commercial Bank for
Industry and Trade from 2008 to 2012 and vision up to 2015
5. Research methodologies
Method of dialectical materialism and historical materialism, logical
method, statistical and synthesic methods, other methods such as:
comparative, inductive, deductive moethods.
6. Contributions of the thesis
The dissertation systematizes, clarifies theories on market risk
management in the context of world economic integration and
increasing competitive pressures in the business activities of
commercial banks; introducing basic contents about market risk
(within the scope: interest rate risk and exchange rate risk) of
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Vietnam Joint Stock Commercial Bank for Industry and Trade
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Chapter 1
GENERAL ISSUES ON THE MARKET RISK MANAGEMENT
OF COMMERCIAL BANKS
1.1. Market risk in operations of commercial banks
1.1.1. The concept of market risk
The market risks may be defined as the possibility of loss to the bank
cause by the changes in market variables. It is the risk that the value of
on-/ of- balance sheet positions will be adversely effeced by the
movements in equity and interest rate markets, currency exchange rates
and commodity prices, or risks for earnings and capital of the bank due
to changes in the market level of interest rates, prices of securities,
foreign exchange and equities as well as the volatilities of those prices .
1.1.2. Types of the market risks
In general, the market risk includes interest rate risk, foreign
exchange risk, securities risk and commodity risk.
1.1.2.1. Interest rate risk
a. The concept of the interest rate risk
The interest rate risk at commercial banks is potential losses which
the bank shall bear when the market interest rate fluctuates. The
interest rate risk is the risk of fluctuations in income and net value of
the bank when the market interest rate changes.
b. Types of interest rate risks:
The interest rate risk consists of three types: Outright Risk, Yield
Curve Risk and Basic Risk.
c. Effects of the interest rate risk
It affects the earning perspective of the bank.
It also has effects over the market value of assets.
1.1.2.2. Exchange rate risk

to- market)
Exchange rate
risk
Yes No
4. Value at risk (VaR) Interest rate risk
and Exchange
rate risk
Yes Yes
1.2. The market risk management at commercial banks
1.2.1. Concepts
The market risk management at commercial banks are the measures,
operations affecting market risk, including measuring, identifying,
CEO
Trading Operaons
Front oce Middle oce Back oce
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monitoring, controlling market risks of banks in order to minimize
possible negative effects on the bank's earnings in the event of the market
changes. In the aspect of operations, the market risk management is the
application of financial instruments to limit or minimize financial loss
caused by market risks.
1.2.2. Objectices of the market risk management
1.2.2.1. Minimizing losses for the bank
One of the important objectives in the market risk management is to
limit, to the maximum extent, any adverse effect of fluctuations in
interest rates and exchange rates over the bank's income. Although
interest rates, exchange rates change, banks always want to achieve their
expected incomes at a relatively stable level.
1.2.2.2. Increasing profits for the bank
In addition to minimizing losses caused by market risks, the bank can

in the part of monetary risk quantification above.
c. Risk monitoring and controlling
The bank should consider if the present strategies are suitable
with risk
files as bank’s periodical expectation. Senior management
board and the bank should build a report system which allows them
to monitor current and potential risks to ensure the consistence with
the proposed target. They also should set up and maintain an
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effective controlling system. They need to check and update each
step of the quantification process to guarantee the honesty and
reasonability.
1.2.3.4. Limit management
The market risk management limits include: Opening positions; Stop-
loss limits; Total book Limits; Counterparty Limits; Interest rate gaps
limits, interest rate sensitivity Limits; Value at risk limits (VaR).
1.2.3.5. Using derivative products to avoid market risk
We use derivative tools to change the risks. These derivatitve tools
are: interest rate forward contract, foreign currency forward contract;
interest rate swap, foreign currency swap; foreign currency option,
interest rate option; future contracts.
1.2.4. Influential factors of market risk management in commercial
banks
Technology, professional qualification; legal environment and
financial market development; forecasting system of market, interest and
exchange rate.
1.3. EXPERIENCES OF MARKET RISK MANAGEMENT
IN SEVERAL FOREIGN BANKS
This thesis works on the experiences of these prestigious banks: KDB
(The Korea Development bank) – Korea and Calyon Bank, Ho Chi Minh
Business Division

Retail Bankin DivisionHuman Resources
Division

Markeng Division

Informaon Division

Supporng DivisionFinance Division
Risk Management DivisionOferaonal
Division

Branches

Dept
Transacon o(ce

Training center

2008. With core product of bank services, Vietinbank has a banking
network on the whole nation. The number of staff is above 18.000, which
ranks the second of number in Vietnam bank system. Vietinbank is the
official member of many prestige organizations.
In the process of establishment and development, from a specialized
bank, Vietinbank has been through many steps to reinforce its position of
a big state-owned commercial bank in Vietnam.
2.1.2. Organizational structure
The organizational structure of Vietinbank is described as below:
Chart 2.1. Targeted operational model in period 2013 - 2015
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Source: Vietinbank
2.1.3. Operation ability
2.1.3.1. Capital mobilization ability
It is one of the banks that have strong capital resources. Up until
31/12/2012, mobilized funds amounted to 461 thousand billion VND,
increasing 9.4% comparing with 2011 and accounting for 12% banking
market shares.
2.1.3.2. Lending and investment ability
Total assets until 31/12/2012 is 505 thousand billion VND, increased
by 9.8% comparing with 2011, Vietinbank is always one of the
commercial banks that own the largest asset scale in Vietnam banking
system. In 2012, Vietinbank’s total loans and investments was 471
thousand billion VND, increased by 9.2% comparing with 2011.
Table 2.1: Credit activities of Vietinbank (Unit: billion VND)
Target 2009 2010 2011 2012
1. Short term loans 93.372 141.377 176.605 200.363
2. Medium and long term loans 69.796 93.660 113.596 131.571
3. Finance leasing 820 1.222 200 0
4. Other loans 1.082 1.864 6.733 0

management which defines clearly the function and duty of each
department from Board of directors to professional departments.
In 2013, Vietinbank started to apply interest risk management
regulations accordance with its business scale and activities. This creates
good conditions to monitor and operate interest risk management
effectively. The management model is described as below:
Board of Directors
Board of Directors
Risk Management Commiee
ALCO
Supervisory Board
Board of Management
General Director
Deputy General Director
Deputy
Head of Risk Management Division
Departments
Round 1 Round 2
Round 3
Treasury & Capital Market Division
Capital Management & Financial Planning Department
Capital Market
Department
Financial Instuons Department
Business dept
Transacon O(ces
Branches
Risk Management Division
Market risk
Management

automatically report of term differences, revaluation under nominal term and
behaviour, scenarios analysis reports on interest rate increase/decrease
situation, etc in order to faciliate the Bank’s interest rate manegement
activities . Asset - liability management system is now on trial and will be
on operation in 2013.
Re-pricing terms of all loans are required to be adjusted based on the re-
pricing terms of fund mobilised and are controlled within establised limits
by the bank.
To 31/12/2012, cumulative interest rate gap/assets of all the terms
as below:
Chart 2.1: Cumulative interest rate gap
When the interest rate increases, Vietinbank will take risks of net
profit decrease of all the terms. When the interest rate decreases
Vietinbank’s profit will increase. In fact from 31/12/2012 to now the
interest rate decreased.
Interest risk management at transaction level
- All the credit contracts are required to include terms relating to interest
rate risk prevention to ensure the Bank can hold initiative in coping with all
the abnominal fluctuations of the market, lending interest rate must reflect
the bank’s actual funding cost.
- Management through the Fund Transfer Pricing (FTP). From
02/04/2011, Vietinbank has implemented the fund transfer pricing system
(FTP) following term- matching principle for every single transaction in line
with international practices. Depending on the orientation of the bank and
market movements, the Head Office can change the fund price for each
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type of customers or products to give signals for each business unit to
determine their lending fund/mobilization rate.
2.2.1.5. Using derivative products and forecasting
interest rate uctuation in Vietnam Joint Stock

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department.
Table 2.2: Foreign currency limits in bank branches
FOREIGN CURRENCY LIMITS IN BANK BRANCHES
Group
Maintained foreign currency position
USD Other currencies converted to USD
Group 1 +/- 2,500,000.00 +/- 500,000.00
Group 2 +/- 2,000,000.00 +/- 400,000.00
Group 3 +/- 1,000,000.00 +/- 300,000.00
Group 4 +/- 500,000.00 +/- 200,000.00
Group 5 +/- 300,000.00 +/- 200,000.00
 Regulations of transaction limits, loss limits with foreign currency
trading in international foreign currency market:
Table 2.3: Foreign currency position and transaction limits, loss limits
FOREIGN CURRENCY POSITION AND TRANSACTION LIMITS
Dealer’s name
Foreign currency
position in day
Foreign currency
position overnight
Transaction limit
A 1,000,000.00 500,000.00 1,000,000.00
B 1,000,000.00 500,000.00 1,000,000.00
C 750,000.00 500,000.00 750,000.00
LOSS LIMIT (Unit: USD)
Dealer’s name Day Month Year
A 3,500.00 5,500.00 14,000.00
B 3,000.00 5,000.00 14,000.00
C 2,000.00 4,000.00 8,000.00

primitive methods and tools; incomplete organizational structure, lack
of experts on market risk management, inconsistencies between
technology and reporting system.
2.3.2.2. The causes of weaknessess
a. Objective causes
The customer knowledge of methods and business about risk
prevention are still limited; activities on the world currency market has
taken place extremely complicated, which is adversely affect the business
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operations of the Vietnam commercial banks; transactions (risk
management products) on foreign currency market in Vietnam has not
yet developed enough for commercial banks to have an effective risk
management method; State bank of Vietnam has been intervenes heavily
in the financial with administrative order tools.
b. Subjective causes
The understanding of risks and risk impacts of business officials are
not thorough and profound enough; the training of human resources
needs a lot of time and effort; the cost of the software for the risk
management is too high; banks do not have the incentive mechanism to
encourage staffs who work effectively.
.
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CHAPTER 3
SOLUTIONS TO ENHANCE THE CAPABILITY OF MARKET RISK
MANAGEMENT AT VIETNAM JOINT STOCK COMMERCIAL
BANK FOR INDUSTRY AND TRADE
3.1. Development orientation of Vietnam Joint Stock Commercial
Bank For Industry And Trade
3.1.1. General orientation
3.1.2. Orientation for market risk management of Vietnam Joint

supervise and manage all types of business risk. In 2013, Vietinbank has
begun to adopt a new method called " 3 stages of control " in terms of
form. It is important for now and the next year is to uphold the
responsibility and capability of the ALCO members.
3.2.3.2. Completing the market risk management procedures
Completing the procedures and meeting all the requirements of Basel
2 in each following stage: (1) Identifying market risk (2) Measuring the
market risk, including the collection of market risk data, building
scenarios and assumptions, and last, calculating the level of risk, (3)
Monitoring risk through market risk report and market risk assessment
strategies (4) Controlling risks through risk limit and the audit process of
market risk management.
3.2.3.3. Finalizing market risk management method
Managing market risk with Value at Risk method; Managing interest
rate risk with Duration Gap method.
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3.2.3.4. Completing limit instruments:
Bank limits the market risk limits to be consistent with the business
practices and risk appetite of Vietinbank in the following fiscal year and
on a quarterly basis, or when there are changes in business plans or a
large market fluctuations, on the basis of last year Income statement and
the business plan of the following year.
3.2.3.5. Using derivatives to shield the market risk
This is a very effective tool to shield the market risk in both short and
long term. There are 4 types of basic derivatives: Forwards, Swaps,
Options and Futures. Vietinbank has not yet used the future. Besides,
establishing a good relationship with other bank creates the opportunity
to attract capital with good prices, thus also reducing market risk.
3.2.4. Installing modern facilities, setting up risk
management softwares