VIETNAM NATIONAL UNIVERSITY, HANOI
SCHOOL OF BUSINESS

VAN THU HUONG LIQUIDITY RISK MANAGEMENT
IN LIEN VIET COMMERCIAL JOINT STOCK BANK
MASTER OF BUSINESS ADMINISTRATION THESIS


MASTER OF BUSINESS ADMINISTRATION THESIS Supervisors:
1. Dr. Chu Thanh
2. MBA Ha Nguyen

Hanoi - 2010

vi TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
ABSTRACT ii
TÓM TẮT iv
LIST OF ABBREVIATIONS x
LIST OF TABLES xi
LIST OF FIGURES xii
INTRODUCTION 1
CHAPTER I: LITERATURE REVIEW 5

1.5. State Bank of Vietnam regulations 33
1.6. Practices for liquidity risk management 37
1.6.1. The Hongkong and Shanghai Bank Corporation 37
1.6.2. Asia Commercial Bank 38
CHAPTER 2. LIQUIDITY RISK MANAGEMENT IN LIENVIETBANK 41
2.1. Overview on LienVietBank 41
2.1.1. Introduction 41
2.1.2. Business Results 44
2.1.3. Organization structure 44
2.2. Liquidity risk in LienVietBank 45
2.2.1. SBV’s regulations on liquidity ratios in the activities of credit institution

viii 46
2.2.2. Supplies of Liquidity 47
2.2.2.1. Liquid Assets 48
2.2.2.2. Loans repayment 53
2.2.2.3. Total mobilized funds and chartered capital 55
2.2.3. Measurement of Liquidity risk via Gap Analysis 59
2.2.3.1. LienVietBank’s Liquidity Gap report in VND (see table 2-11) 60
2.2.3.2. LienVietBank’s Liquidity Gap report in USD (see table 2-12) 63
2.2.4. Assessment on current status of liquidity risk 65
2.3. General situation of risk management at LienVietBank 67
2.3.1. From establishment to end 2008 67
2.3.2. For the year of 2009 68
2.3.3. From the beginning of 2010 to now 69
2.4. Liquidity risk management in LienVietBank 69
2.4.1. Strategy and Policy 69

Appendix 1 112
Appendix 2 113
Appendix 3 114
Appendix 4 115 x LIST OF ABBREVIATIONS
ACB Asia Commercial Bank
ALCO Asset and Liability Committee
BOD Board of Directors
BOM Board of Management
CAR Capital Equity Ratio
HR Human Resource
LVB LienViet Commercial Joint Stock bank
NPLs Non performing loans
SBV State Bank of Viet Nam
Sacombank Sai Gon Thuong Tin bank
TCB Vietnam Technological and Commercial Joint stock bank
VCB The Bank for Foreign Trade of Vietnam
xii LIST OF FIGURES
Figure 1- 1: Three pillars of Basel II 13
Figure 2-1: Comparison of the ratio of liquid assets to total assets 50
Figure 2-2: Total mobilized funds of LVB 56
Figure 2-3: The number of accounts of incoming customer deposits 58
Figure 2-4: Rating liquidity risk management in LVB 77
Figure 3-1: Overview on chapter 3……………………………………………… 81
Figure 3-2: Recommendation for Organization structure 87
Figure 3-2: Recommendation for Process of liquidity risk management (procedures)
95 1 credit risk management and pays no attention to risk management activities,
particularly the management liquidity risk.
And if there is a crisis similar to the liquidity crisis in 2008, the bank will face
the enormous difficulty. It is the reason why I decided to choose the topic
“Liquidity risk management in Lien Viet Commercial Joint Stock Bank” for my
thesis.
2 Research Objective
The aim of the research is to analyze and assess the current status of liquidity
risk management in LienVietBank and to propose appropriate recommendations
to enhance the efficiency in liquidity risk management in LienVietBank. The
thesis therefore aims to achieve the following objectives:
 Systemize the basic theoretical problem about liquidity risk and liquidity risk
management in commercial banking.
 Identifying and assess current situations of liquidity risk and liquidity risk
management in LienVietBank.
 Propose recommendations and solutions to enhance the efficiency in
liquidity risk management in LienVietBank.
3 Research Scope
For the purpose and requirement of an MBA graduate thesis, the thesis only
focuses on liquidity risk and liquidity risk management in Lien Viet Commercial
Joint stock bank.
4 Information sources
 Statistic data gathered at LienVietBank (financial statements, official
releases of LienVietBank).
 Data from other sources such as other banks, books, internet, related journals 3


Chapter 3: Recommendations and Solutions
Conclusion
References
5 CHAPTER I: LITERATURE REVIEW
This chapter aims to answer the research questions about liquidity risk. Firstly,

2
Source: arcuclesbase.com
3
Source:
4
Source: S.Rose, Peter and C.Hudgins, Sylvia, (2008), Bank management & Financial Services, page 6 6 1.1.2 Products & services provided by commercial banks
Commercial banks offer many types of products and services which can be
summarized as below:
Table 1-1: Products & services provided by commercial banks
1

Products & Services Content
Liability products
Represent liabilities of the bank, include checking and
savings accounts, certificates of deposit and other
types of deposit products
Asset Products
Represent the primary assets of the banks, these
products normally take the form of personal and
business loans, mortgages, auto loans and credit cards
Electronic banking
Include the maintenance and expansion of 24-hour
ATM networks, wire transfers and banking websites
that allow consumers and business to obtain account

Risk in a banking organization is possibility that the outcome of an action or
event could bring up adverse impacts. Such outcomes could either result in a
direct loss of earnings/capital or may result in imposition of constraints on
bank’s ability to meet its business objectives. Such constraints pose a risk as
these could hinder a bank's ability to conduct its ongoing business or to take
benefit of opportunities to enhance its business.
Banks often distinguish between expected and unexpected losses. Expected
losses are those that the bank knows with reasonable certainty will occur (e.g.,
the expected default rate of corporate loan portfolio or credit card portfolio) and
are typically reserved for in some manner. Unexpected losses are those
associated with unforeseen events (e.g. losses experienced by banks in the
aftermath of nuclear tests, Losses due to a sudden down turn in economy or
falling interest rates). Banks rely on their capital as a buffer to absorb such
losses.
Risks are usually defined by the adverse impact on profitability of several
distinct sources of uncertainty. While the types and degree of risks an
organization may be exposed to depend upon a number of factors such as its
size, complexity business activities, volume etc, it is believed that generally the

1
State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs, page
1 8 banks face Credit, Market, Liquidity, Operational,
Compliance/Legal/Regulatory and reputation risks. Before overarching these
risk categories, given below are some basics about risk Management and some

2
State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs, page 17
3
Source: Basel Committee on Banking Supervision, (2008), Principles for sound liquidity risk management
and supervision, page 1
4
Source: Bank for International Settlements, Sound Practices for the Management and Supervision of
Operational Risk, ,page 2 9 “Banks are in the Business of Managing Risk, Pure and Simple, that is the
Business of Banking” (Walter Wriston, Chairman an CEO Citicorp 1970-
1984)”
The acceptance and management of financial risk is inherent to the business of
banking and banks’ roles as financial intermediaries. Risk management as
commonly perceived does not mean minimizing risk; rather the goal of risk
management is to optimize risk-reward trade-off. Bank accepts risks that are
uniquely part of the array of bank’s services.
Risk management activities broadly take place simultaneously at following
different hierarchy levels.
Strategic level: It encompasses risk management functions performed by senior
management and board of director. For instance definition of risks, ascertaining
institutions risk appetite, formulating strategy and policies for managing risks
and establish adequate systems and controls to ensure that overall risk remain
within acceptable level and the reward compensate for the risk taken.
Macro Level: It encompasses risk management within a business area or across
business lines. Generally the risk management activities performed by middle


The Supply of Liquidity
 Incoming customer deposits
 Revenues from the sale of nondeposit services
 Customer Loan repayments
 Borrowing from the money market
 Selling assets
 Capital and Reserve
The Demand for Liquidity
 Customer deposit withdrawals
 Credit requests from quality loan customers

1
Source : Autorite Des Marches Financiers, (2009), Liquidity risk management guideline, page 7
2
Source: S.Rose, Peter and C.Hudgins, Sylvia, (2008), Bank management & Financial Services,
Chapter 11: Liquidity and Reserve Management: Strategies and Policies 11  Repayment of nondeposit borrowing
 Operating expenses and payment of tax
 Payment of dividends by cash
Net liquidity position
The following sources of liquidity and supply come together to determine each
bank’s net liquidity position at any moment of time:
Net liquidity position = Supplies of liquidity – Demand of liquidity
 Liquidity Shortage: Net liquidity position > 0 (greater than zero)

 Sensitivity to rate change: rate of profit by other banks on deposits
rise/change of profit rate of deposit
 Loss of public confidence
 Unanticipated change in cost of capital
 Abnormal behavior of financial market
 Incorrect judgments and complacency
 Conversion of non-funded based limit into funded based
 Severe deterioration of assets quality
1.3.2. Basel and Basel II requirements
The Basel Committee on Banking Supervision is a committee of banking
supervisory authorities that was established by the central bank governors of the
Group of Ten countries in 1975. It consists of senior representatives of bank
supervisory authorities and central banks from Belgium, Canada, France,
Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden,
Switzerland, the United Kingdom, and the United States. It usually meets at the
Bank for International Settlements in Basel, where its permanent Secretariat is
located.
Basel II is the second of the Basel Accords which are recommendations on
banking laws and regulations issued by the Basel Committee on Banking
Supervision. Basel II uses a "three pillars" concept – (1) minimum capital 13 requirements (addressing risk), (2) supervisory review and (3) market discipline
– to promote greater stability in the financial system.
Figure 1- 1: Three pillars of Basel II

(Source:

Principle 1
- Establish a robust liquidity risk
management framework that ensures it
maintains sufficient liquidity, including a
cushion of unencumbered, high quality
liquid assets, to withstand a range of stress
events, including those involving the loss or
impairment of both unsecured and secured
funding sources
- Supervisors should assess the adequacy
of both a bank's liquidity risk management
framework and its liquidity position
Governance of
liquidity risk
management
Principle 2,
3, 4
- Should clearly articulate a liquidity risk
tolerance
- Should develop a strategy, policies and
practices to manage liquidity risk in
accordance with the risk tolerance and to
ensure that the bank maintains sufficient
liquidity
- Should incorporate liquidity costs,
benefits and risks in the product pricing,
performance measurement and new product
approval process for all significant business
activities (both on- and off-balance sheet)


positions, differentiating between
encumbered and unencumbered assets
- Should conduct stress tests on a regular
basis for a variety of institution-specific and
market-wide stress scenarios
- Should have a formal contingency
funding plan (CFP)
- Should maintain a cushion of
unencumbered, high quality liquid assets
to be held as insurance against a range of
liquidity stress scenarios
Public disclosure Principle 13
Should publicly disclose information on a
regular basis 16 The role of
supervisors
Principle 14,
15, 16, 17
- Supervisors should regularly perform a
comprehensive assessment of a bank’s
overall liquidity risk management
framework and liquidity position
- Supervisors should supplement their
regular assessments of a bank’s liquidity
risk management framework and liquidity

Source: Basel Committee on Banking Supervision, (2008), Principles for sound liquidity risk management
and supervision.
6
Source: HSBC Holding plc, (2008), Capital and Risk Management Pillar 3 Disclosures as at 31 December
2008