vi

TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
ABSTRACT ii
TÓM TẮT iv
TABLE OF CONTENTS vi
LIST OF FIGURES ix
LIST OF TABLES x
LIST OF ABBRIVIATIONS xii
INTRODUCTION 1
CHAPTER 1: OVERVIEW OF LIQUIDITY RISK MANAGEMENT IN
BANKS 2
1.1 Introduction of liquidity risk 2
1.2 Liquidity risk classification 3
1.3 International standards in management and supervision of liquidity risk 4
1.3.1 Basel’s principles for the management and supervision of liquidity risk 4
1.3.2 Liquidity measurement and management 6
1.3.3 Monitoring tools for liquidity risk management 9
1.4 State bank of Vietnam’s regulations on liquidity risk management 12
1.4.1 Capital adequacy ratio – CAR 14
1.4.2 Credit limits 14
1.4.3 Limits on capital contribution and share purchase 16
1.4.4 Ratio of granted credit to mobilized capital 17
1.4.5 Solvency ratios 17
vii

1.5 Conformity of State bank of Vietnam’s regulations to the international
standards in liquidity risk management 24
1.6 Lessons from other bank’s liquidity risk management process 25
1.5.1 Overview of liquidity risk management policy 26

Figure 2.1 Techcombank’s ALCO structure 38
Firgure 2.2 Techcombank’s Treasury structure under ALCO BSM 40
Firgure 2.3 Techcombank’s liquidity risk management process 42
x

LIST OF TABLES

Table 1.1 Credit limits on debt to clients 14
Table 1.2 Credit limits on debt to related clients 15
Table 1.3 Limits on financial leasing 16
Table 1.4 Limits on capital contribution and share purchase 16
Table 1.5: Ratio of granted credit to mobilized capital 17
Table 1.6: Overnight solvency ratio report 19
Table 1.7: 1 – 7 days solvency ratio report 21
Table 2.1: Financial highlights of Techcombank (2008 – 2011) 31
Table 2.2: 1-7 days solvency ratio for each currency 34
Table 2.3: Overnight solvency ratio for each currency 35
Table 2.4: Capital Adequacy Ratio 36
Figure 2.1 Techcombank’s ALCO structure 38
Firgure 2.2 Techcombank’s Treasury structure under ALCO BSM 40
Firgure 2.3 Techcombank’s liquidity risk management process 42
Table 2.5: Daily cash flows report 43
Table 2.6: VND Liquidity gap analysis 45
Table 2.7: USD Liquidity gap analysis 50
Table 2.8: Techcombank’s Solvency limits 55
Table 2.9: Techcombank’s Solvency ratio report at 28 and 29 March 2012 55
Table 2.10: Forecast daily solvency ratios report 57
Table 2.11: Liquidity stress testing modeling 60
xi


Maximum Cumulative Outflows
PFS
Personal financial services
S&D
Sales and distribution division
SBV
State bank of Vietnam
SME
Small and medium enterprise
Techcombank
Viet Nam Technological and Commercial joint stock bank

1

INTRODUCTION

Risk is inherent in any business in general and in financial sector in particular. It has
become key focuses for managers and regulators since some recent decades,
specially liquidity risk, after some recent global financial crisis. After and after each
crisis, regulators want to implement stricter regulations to prevent financial
institutions from liquidity difficulties. Financial institutions’ managers also pay
much more attention to liquidity issues to ensure banks’ safe and durable
development.
The subject of thesis focuses on liquidity risk management. This is nearly new and
hot topic in Vietnam financial market, since State bank of Vietnam has just issued
regulations on prudential ratios in 2010 and series of its amendment right after. The
regulations affect immediately banks’ balance sheet structure and also long term
business orientation.
It’s necessary to study on the subject to understand the international principles,
measurement and management practices to apply adequately in Vietnam

sovereign downgrade and any other events that could impact bank’s business.
Liquidity is the ability of a bank to fund increases in assets and meet obligations as
they come due, without incurring unacceptable losses. This definition is broader
than that concept that is only possession of cash or assets that can be readily
converted into cash.
Liquidity risk management nowadays has become one of most challenging to any
financial managers. Understanding the term, risk classification and measurement
3

that help managers well control the risk and lead business to achieve their targets
and goals.
1.2 Liquidity risk classification
Liquidity risk could arise from internal or external factors. And level of liquidity
risk, as well as the quantity of the available sources of liquidity, varies, depending
on circumstances and their duration. In other words, specific circumstances define
level of liquidity risk. By understanding each specific circumstance, managers could
sound understanding, measuring, and managing of liquidity risk.
According to best practice in the financial market, liquidity risk is classified into
three categories, including:
- Structural liquidity risk
- Contingency liquidity risk
- Market liquidity risk
Structural liquidity risk refers to the liquidity risk in the bank’s current balance
sheet structure due to maturity transformation in the cash flows of each individual
position. This also called mismatch risk that results from both contractually and
behavior driven cash flows.
Contingency liquidity risk is the risk that future events may require a significantly
larger amount of cash than a bank projects it will need. It is the risk of not having
sufficient funds to meet sudden and unexpected short term obligations. Unexpected
obligations can arise due to unusual deviations in the timing of cash flows or

1.3.1.2 Governance of liquidity risk management
Principle 2: Bank should establish risk appetite for its own business, including
liquidity risk tolerance.
5

Principle 3: Bank should develop a strategy, policy and practices for managing
liquidity risk according to bank’s risk appetite. These should be reviewed regularly
at least annually.
Principle 4: Bank should develop an internal fund pricing system that includes
liquidity costs, benefits and risks that products and services create for bank’s
portfolio.
1.3.1.3 Measurement and management of liquidity risk
Principle 5: Bank should establish a sound process for indentifying, measuring,
monitoring and controlling liquidity risk.
Principle 6: Bank should actively monitor and control liquidity risk.
Principle 7: Bank should develop an effective and diversified funding strategy.
Principle 8: Bank should actively manage intraday liquidity position to meet all
payments on timely basis under normal and stress conditions.
Principle 9: Bank should actively manage collateral positions.
Principle 10: Bank should conduct stress tests regularly for short term and bank case
specific and market case specific. After conducting stress test, bank could review
and adjust liquidity risk strategy and policy do develop effective contingency plan.
Principle 11: Bank should have official contingency funding plan that defines
strategies for liquidity shortfalls in emergency case.
Principle 12: Bank should maintain a cushion of unencumbered assets, high quality
liquid assets to withstand a range of stressed scenarios.
1.3.1.4 Public disclosure
Principle 13: Bank should publicly and regularly disclose information so that
market participants could know about the change in liquidity risk management
framework and liquidity position.

7

1.3.2.1 Liquidity Coverage Ratio (LCR)
100
dayscalendar 30next over the outflowscash net Total
assets liquidquality -high ofStock


LCR means minimum level of stock of high quality liquid assets that can be
converted into cash to ensure bank’s liquidity during 30 calendar day time horizon.
LCR is expected to meet requirement for each common currency so that bank is
ready to liquidity of each currency in daily operation.
Stock of high quality liquid assets
This numerator requires bank maintain adequate limit of encumbered liquid assets
to meet its liquidity.
These assets could be easily and immediately converted to cash at little or no loss of
value. This depends on specific stress scenarios, amount and also time frame. It’s
ideal if these assets are eligible at central bank for intraday liquidity and overnight
operation.
These assets involve characteristics as follows:
- Low credit risk and market risk
- Ease and certainty of valuation
- Low correlation with risky assets
- Listed on developed and recognized exchange market
- Active and sizable market
- Presence of committed market makers
- Low market of concentration
- Flight to quality
8


1.3.2.2 Net Stable Funding Ratio - NSFR
100
funding stable ofamount Required
funding stable ofamount Available


NSFR is structured to ensure that long term assets are funded at least a minimum
amount of stable liabilities in relation to their liquidity risk profile.
Available amount of stable funding is total sum of:
- Capital
- Preferred stock with maturity that equal or greater than one year
- Liabilities with maturity that equal or greater than one year
- Portion of non maturity deposits or term deposits under one year but
expected to remain with financial institutions when it due or under stress
scenarios.
- Portion of wholesales under one year but expected to remain with financial
institutions when it due or under stress scenarios.
Required amount of stable funding for assets and off balance sheet exposure is
measured by using supervisor assumptions on the broad characteristics of liquidity
profile of assets, off balance sheet exposures and other activities. It is calculated as
the sum of assets held and funded, multiplied by a specific required stable funding
(RSF). Basel III also guides detailed compositions of asset categories and associated
RSF so that financial institutions could easily apply.
1.3.3 Monitoring tools for liquidity risk management
Besides these two standards in the section above, Basel III has guided series of
monitoring tools as a framework for liquidity risk management. But supervisors
may need add supplement and develop this framework by using additional tools to
capture liquidity risk adequate to their bank’s business environment.
These tools include the five following:
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List of asset and liability amounts by significant currency
These applications measure concentration of funding, to know how bank depends
on each significant counterparty or product/instrument. One counterparty or
product/instrument are considered as significant if aggregate amount of that
counterparty or product/instrument count for more than 1% of total bank’s balance
sheet.
In order to capture the amount of structural currency mismatch, bank must provide a
list of the amount of assets and liabilities in each significant currency. To be
consider as significant currency, aggregate liabilities in that currency must be
counted for or more 5% of total liabilities.
1.3.3.3 Available unencumbered assets
Available unencumbered assets are marketable as collateral in secondary market
and/or eligible for central banks’ standing facilities.
These assets are additional sources of bank’s liquidity. Supervisors must know
quantity and key characteristics of the assets for bank’s liquidity in emergency case,
including secondary market condition (haircuts, aggregate amount, counterparty…)
and central bank’s related policies for each period.
1.3.3.4 Liquidity coverage ratio by significant currency
In order to better capture currency mismatch, bank should also monitor liquidity
coverage ratio for each significant currency.
currencyt significaneach in period day time 30 aover outflowscash net Total
currencyt significaneach in asets liquidquality high ofStock
LCRCurrency Foreign 

As the foreign currency LCR is a monitoring tool, not a standard, so it does not
have an international minimum requirement, bank supervisors and managers should
establish minimum level to monitor adequately to bank’s specific case and
environment.

12

NHNN dated 20 May 2010 of the Governor of the State Bank on prudential
ratios in activities of credit institutions;
- Circular number of 33/2011/TT-NHNN of October 08, 2011, of the State
Bank of Vietnam amending, supplementing some articles of the Circular No.
13/2010/TT-NHNN dated May 20, 2010 of the State Bank of Vietnam
stipulating prudential ratios in operations of credit institutions and
regulations on lending by credit institutions to clients issued with the
Decision 1627/2001/QD-NHNN dated December 31, 2001 of the governor
of the state bank.
It is also called Circular number of 13, in brief. These regulations refer to credit
institutions operating in Vietnam, excluding the Social Policy Bank, the Vietnam
Development Bank and grassroots people's credit funds. Prudential ratios stipulated
in this Circular include:
- Capital adequacy ratio;
- Credit limits;
- Limits on capital contribution and share purchase;
- Ratio of granted credit to mobilized capital;
- Solvency ratio;
These five ratios attempt to manage bank’s operations in line of risk limit, to ensure
the reasonable risk tolerance in each credit institution. By complying with these
regulations, each bank meets the common standards to reduce the risks in the
business, including liquidity risk.
We pass shortly the first four ratios and focus on the last one relating to liquidity
management.
14

1.4.1 Capital adequacy ratio – CAR
Individual capital adequacy ratio =
Own capital
Total risk-weighted assets

Table 1.2 Credit limits on debt to related clients
No
Ratios
Limit
1
Debts and guarantee amounts/Capital for an enterprise that
credit institution has right to control
10%
2
Debts and guarantee amounts/Capital for more than one
enterprise that credit institution has right to control
20%
3
Unsecured credit/Capital to financial institution's affiliated
financial leasing companies
5%
4
Credit to its affiliated companies being securities trading
businesses
0%
A credit institution may not provide unsecured loans for securities investment and
trading.
The total outstanding debts and discounts of valuable papers for all clients for
securities investment and trading must not exceed 20% of the credit institution.
In case the capital need of a single client exceeds the loan limits specified in the
clauses above, credit institutions and foreign bank branches may provide
syndicated credit under regulations of the State Bank.
In special cases, in order to perform socio economic tasks, if capital syndication
abilities of credit institutions and foreign bank branches fail to meet loan or
financial lease requirements of a single client, the Prime Minister may decide on

associated companies in a single enterprise, investment
fund, investment project or another credit
institution/Charter capital of the latter.
11%
3
Capital contribution and share purchase in all of its
affiliated companies/Charter capital and reserve fund
25%
4
Capital contribution and share purchase in all enterprises,
investment funds, investment projects or other credit
institutions and in its affiliated companies/ Charter capital
and reserve fund
40%
17

1.4.4 Ratio of granted credit to mobilized capital
Credit institutions must comply with all regulations on solvency ratio and other
prudential ratios stipulated in the circular before and after of grant of credits.
Table 1.5: Ratio of granted credit to mobilized capital
No
Ratios
Limit
(maximum)
1
Mobilized capital/ Granting credit for bank
80%
2
Mobilized capital/ Granting credit for non bank credit
institutions

- Applying adequacy models for liquidity stress test and scenario test
Solvency ratios
There are two solvency ratios: overnight and 1-7days solvency ratio Overnight solvency ratio: minimum at 15%