Liquidity Management And The Best Strategy For Banks Finance Essay

Liquid and liquidness hazard direction are the most important factors for safety of any Bankss. In present, there are legion Bankss have confronted with liquidness strains when the competition has been more ferociously to pull sedimentations. Come along with the development of fiscal market, chances and hazards of liquidness direction are besides addition.

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Vietnam has well grown for two decennaries from 1990-2009 peculiarly in the last 10 old ages ( 2000-2009 ) Vietnam experienced a applaudable growing at an mean rate of about 7.2 % per twelvemonth[ 1 ]. Consequently, the capital flows come into Vietnam has besides risen significantly. Banking system plays a important function to lend this impressive development in Vietnam. However, there were several Bankss ( some little articulation stocks Bankss ) faced with illiquidity in two old ages 2007-2008 before being controlled purely by State Bank of Vietnam ( SBV )[ 2 ]. Additionally, as we witnessed the largest banking crisis since 1929-1933 that “ started in August 2008 reached a flood tide in the fall of 2008 with a moving ridge of bank nationalisations across North America and Europe ”[ 3 ], liquidness direction of commercial Bankss is still a terrible issue. In this on the job paper, we will happen out what is a effectual scheme associating to liquidity direction of commercial Bankss in Vietnam in period of 2007-2008, we will analyse this scheme to reply as if it is truly effectual. This paper is divided into three parts. First of all is the fundamental of liquidness direction, scheme of liquidness direction in Vietnam. Second, it mentions general background against banking system every bit good as analysing liquidness direction of commercial Bankss in Vietnam ( 2007-2008 ) . Last but non least, reexamine the instance of bank for investing and development of Vietnam ( BIDV ) so points out its liquidness direction scheme is effectual or non.

Initially, there are some definitions about liquidness, liquidness hazard need to be elucidated. What is liquidness and why is liquidity direction of import? Bank liquidness means “ the short-term ability of commercial Bankss to serve sedimentation backdowns and loan petitions ”[ 4 ]. Furthermore, liquidness hazard is “ the possibility that a bank will be unable to run into its liquid liabilities because of unexpected backdowns of sedimentations. An unexpected liquidness deficit means that the bank is non merely unable to run into its liability duties but besides unable to fund its illiquid assets ” or can fund it with high cost[ 5 ]. Liquid and solvency are the celestial twins of banking, an illiquid bank can quickly go bankrupt, and insolvent bank illiquid[ 6 ]. Therefore, if a bank ‘s leaders are non able to pull off efficaciously bank liquidness, the bank will diminish well its net income, even perchance travel insolvent. That why liquidness direction is weighty.

There were 45 commercial Bankss in Vietnam including 5 state-owned Bankss which held a immense proportion market portion of banking system and 40 joint stock Bankss in 2008. Though these joint-stock Bankss have had an astonishing development in the last 10 old ages, they merely made up about over one 3rd banking market portion. In the period 2007-2008, joint-venture Bankss and foreign bank subdivisions held about 10 per centum of market portion in Vietnam[ 7 ].

Covering with an unprecedented rising prices rates at 12.63 % in 2007 and 19.89 % in 2008[ 8 ], the authorities of Vietnam decided to fasten pecuniary policy, diminish money supply and cut down budgetary outgos. As a effect, Bankss obligatorily joined a race in increasing mobilizing involvement rate to vouch their liquidness until SBV promulgated a ceiling involvement rate at 12 per centum per annum[ 9 ]. In early 2008, the interbank money market rates went up aggressively on the land of the deficit of liquidness of Bankss, the highest nightlong interbank rate was over 40 per centum in March 2008, non merely the tight pecuniary policy but besides the job of liquidness direction when Bankss raised dramatically their loan outstanding into high hazard Fieldss as security and estate were pointed as the grounds. When the stock market and house monetary values plumped instantly impacted to bank ‘s loaning in two countries.

Assembling informations from one-year studies, fiscal statements in two old ages 2007-2008 of 32/45 Bankss in their web site ( the other Bankss have non published any relevant paperss via the cyberspace at that minute or run concern since 2008 whereas these Bankss made a bantam proportion market accordingly their influence was unobtrusive ) , in this paper approaches several outstanding ratios below to measure liquidness of commercial Bankss in Vietnam:

Regulatory capital[ 10 ]

Capital Adequacy Ratios ( CAR ) =

Ratio 1=

Ratio 2=

Ratio 3=

or

Ratio 4=

Ratio 5=

Ratio 6=

These ratios above are based on ordinances in Decision No.457/2005/QA?-NHNN[ 11 ]on ratios guarantee the safe operation of banking system and some other relevant determinations issued by SBV and several ratios used by Bankss in Vietnam in order to pull off liquidness.

Chartered capital and CAR

CAR besides known as “ Capital to Risk Weighted Assets Ratio ( CRAR ) ” , it is expressed as a per centum of a bank ‘s hazard weighted recognition exposures. This ratio is used to protect depositors and advance the stableness and efficiency of fiscal systems[ 12 ].

Car is calculated by:

The tabular array below shows regulative capital and CAR of Bankss in Vietnam.

Table 1: Chartered capital and Ratio CAR of Bankss in Vietnam[ 13 ]

( 31/12/2008 )

Unit of measurement: million lb, per centum

Bank

CHARTERED CAPITAL

Car

ACB

212

12.44

Agribank

350

7.20

An Binh

90

38,7

BIDV

291.83

6.5

Dai A

16.7

Dong A

96

14.36

Eximbank

240.6

23

Gia Dinh

33.33

55.50

Habubank

93.33

16.90

HDBank

51.67

Kien Long

33.33

48.14

Military bank

113.33

14.21

Mutual savings bank

50

15.8

Nam Angstrom

41.77

Nam Viet

33.33

OCB

49.13

17.60

Ocean

33.33

PG

33.33

Sacombank

170.5

12.16

Saigonbank

34

SCB

72.67

9.91

SHB

66.67

Southern

67.57

Techcombank

121.4

13.99

VIB

66.67

10.04

Viet A

45.3

Vietcombank

403.33

8.9

Vietinbank

253.6

7.27

VP bank

70.57

21

Western

33.33

MHB

39.4

9.04

Trustbank

16.8

The tabular array above illustrates the huge bulk of commercial Bankss in Vietnam had little regulative capital sizes between about ?30 million[ 14 ]and ?200 million even Agribank and Vietcombank owned biggest hired capital at about ?350 million and ?400 million severally but besides were undistinguished. CAR was stipulated 8 % by SBV in Decision 457, looking at the informations above legion Bankss had achieved this ratio. Notwithstanding, if these Bankss had applied Basel II Accord ‘s minimal capital demand, they would had faced with assorted troubles. Factually, Basel ‘s minimal capital demand was besides determined at 8 per centum[ 15 ], but it attached closely the risk-weighted assets which depend explicitly on scope of elements like the credit-worthiness of the borrower, the adulthood of a loan and dressed ore on loaning to a peculiar group of clients. Empirically, Bankss had to keep their hired capitals a higher degree than the rate of Basel 1 due to Bankss added an extra capital against hazards. Presumably, this would be a disadvantage to Bankss in Vietnam because likely operational hazard of Vietnam ‘s Bankss is lower than international Bankss ‘ hazard of operations, unluckily, Bankss of Vietnam obliged a contrary by 20 % the turnover. Another negative is a big figure of endeavors in Vietnam have non been ranked in the recognition evaluation list therefore their loans would be incurred a high hazard weight at 100 % . However, there are some issues should be noted due to the capital adequateness ratio is presently calculated harmonizing to international criterions, but merely what the accounting criterions of Vietnam, merely a few Bankss, such as Investment Bank Development and execution of indexs calculated in 2 ways[ 16 ].

Table 2: Index of CAR Investment Banking and Development over the old ages from 2005 to 2009

Target

2005

2006

2007

2008

2009

CAR Index ( % ) by VAS

6.86 %

9.1 %

8.94 %

9.53 %

CAR Index ( % ) harmonizing to IFRS

3.36 %

5.9 %

6.7 %

6.5 %

7.55 %

Beginning: BIDV

Ratio 1 and Ratio 2

Ratio 1 is calculated by

Ratio 2 is calculated by

Table 3: Ratio 1 and Ratio 2 of Vietnam ‘s Bankss[ 17 ]

Unit of measurement: per centum

Bank

Ratio 1

Ratio 2

2007

2008

2007

2008

ACB

7.91

7.96

7.33

7.38

Agribank

4.92

4.6

4.69

4.4

An Binh

16.87

41.90

14.44

29.53

BIDV

8.67

7.30

5.69

5.46

Dai A

60.50

31.46

37.70

23.93

Dong A

13.35

11.27

11.77

10.13

Eximbank

22.96

36.28

18.67

26.62

Gia Dinh

58.98

45.95

37.10

31,48

Habubank

15.63

14.52

13.52

12.68

HDBank

5.66

21.21

5.36

17.50

Kien Long

40.86

55.36

29.01

35.63

Military bank

13.61

11.79

11.98

10.55

Mutual savings bank

12.01

6.09

10.72

5.74

Nam Angstrom

14.57

28.01

12.72

21.88

Nam Viet

6.21

10.95

5.85

9.87

OCB

16.39

18.71

14.08

15.76

Ocean

8.87

8.29

8.15

7.65

PG

13.13

19.89

11.61

16.59

Sacombank

12.84

12.79

11.38

11.34

Saigonbank

16.36

15.10

14.06

13.12

SCB

11.46

7.85

10.28

7.28

SHB

21.38

18.71

17.61

15.76

Southern

14.48

12.96

12.65

11.48

Techcombank

9.93

10.45

9.04

9.46

VIB

5.88

7.07

5.55

6.60

Viet A

16.31

16.76

14.02

14.36

Vietcombank

7.37

6.45

6.86

6.06

Vietinbank

6.85

6.41

VP bank

13.67

14.79

12.02

12.88

Western

22.06

45.38

18.07

41.39

MHB

4.04

3.88

Trustbank

24.14

19.47

Ratio 1 and ratio 2 were standardized at upon 5 % , by and large Bankss achieved these. However, ratio 2 comparisons with the similar ratio Equity/Assets of 100 biggest publically traded Bankss in USA from 1990 to 2002 is 8 per centum against research of Evan Gate et Al, April 2006 “ Mananging bank liquity hazard: How deposit – loan synergisms vary withmarket conditions ”[ 18 ], the regulative capital of Vietnam ‘s bank could conceivably be low sing to the concern graduated table.

The tabular array shows that state-owned Bankss such as Vietcombank, Vietinbank, Agribank and BIDV all have low rate about 5 % . As a effect, whenever hazard happened, they might defy difficultly. Yet these Bankss held a immense sum of authorities bond, exchequer measures, authorities particular bond ( merely state-owned Bankss have this sort of bond ) whenever facing with deficit of liquidness via unfastened market operations of SBV increase their liquidness. Contrary, there are a few Bankss achieved really high rate like Dai A, Gia Dinh, Kien Long and Trustbank. Nevertheless, the tabular array below demonstrates that these Bankss confronted with mobilisation financess to their loaning. Presumably, these Bankss perchance had to mobilized capital from others beginnings to fit the demand of borrowers. It can be said that these Bankss possibly acquire a deficit of liquidness.

Table 4: Deposits from clients, sedimentations or borrow from other recognition establishments, loan to clients and other capital utilizations of Dai A, Gia Dinh, Kien Long and Trustbank in 2007[ 19 ]

Unit of measurement: million lb

Bank

Deposits from clients

Deposits or borrow from other recognition establishments

Loan to clients

Other capital utilizations

Difference

( 1 )

( 2 )

( 3 )

( 4 )

( 1 ) + ( 2 ) – ( 3 ) – ( 4 )

Dai A

39.17

0.08

56.5

5.28

-22.53

Gia Dinh

13.9

28

35.03

26.15

-19.28

Kien Long

31.73

16.7

45.03

22.05

-18.65

Trustbank

10.37

6.07

27.71

5.04

-16.31

Therefore, the high rates of ratio 1 and ratio 2 could non certainly good.

State of hard currency ( Ratio 3 )

Ratio 3=

or

Table 5: Ratio of hard currency province of Bankss in Vietnam[ 20 ]

Unit of measurement: per centum

Bank

Ratio 3

2007

2008

ACB

8.07

11.73

Agribank

2.51

5.39

An Binh

2.05

19.53

BIDV

1.94

2.31

Dai A

5.28

10.06

Dong A

8.35

13.83

Eximbank

7.35

15.79

Gia Dinh

36.09

41.54

Habubank

1.98

0.97

HDBank

14.68

21.71

Kien Long

23.22

13.20

Military bank

4.45

37.03

Mutual savings bank

1.01

48.44

Nam Angstrom

33.33

15.79

Nam Viet

41.98

39.78

OCB

25.14

3.27

Ocean

0.26

30.47

PG

23.81

33.72

Sacombank

7.28

15.54

Saigonbank

1.97

13.46

SCB

13.29

2.76

SHB

1.39

0.71

Southern

6.88

13.37

Techcombank

24.78

28.79

VIB

1.38

22.78

Viet A

30.49

24.30

Vietcombank

2.77

5.92

Vietinbank

3.96

VP bank

5.39

11.05

Western

11.88

32.93

MHB

2.86

Trustbank

10.29

12.76

Average

13.14

17.15

15.71

The high ratio 3 assures Bankss ‘ immediate payments. As statistics of table above, there had been a significant figure of Bankss peculiarly big bank had this rate less than 10 % even less than 5 per centum as Agribank, BIDV, MHB, Vietinbank, An Binh, Habubank, Military bank, MSB, Ocean, Saigonbank, SHB, VIB and Vietcombank. When illiquidity or insolvency happen, these Bankss would likely seek support from sweeping market with high involvement or fall in unfastened market operations of SBV “ to defuse pure liquidness issues ”[ 21 ], nevertheless, what go on “ the sweeping markets on which they have relied before should all of a sudden dry up ”[ 22 ]. The event happened in last 2007 and the first one-fourth 2008 proved this consideration, Bankss raised mobilising rate against others, therefore the nightlong rate reached its extremum at over 40 % in March 2008. In instance of BIDV, one manus this bank reduced their current history with other Bankss, in the other manus, in its balance sheets could non separate whether current history with SBV or BIDV ‘s militias, accordingly this figure was excluded in computation ratio 3, that why BIDV ‘s ratio 3 was low.

The ability to impart ( Ratio 4 ) and Ratio 5

Ratio 4 is calculated by

Ratio 5 is calculated by

Table 6: Ratio of ability to impart of Vietnam ‘s Bankss and Ratio 5[ 23 ]

Unit of measurement: per centum

Bank

Ratio 4

Ratio 5

2007

2008

2007

2008

ACB

37.25

33.08

57.54

54.24

Agribank

75.59

73.54

107.43

98.19

An Binh

39.93

48.82

101.21

91.52

BIDV

64.54

65.31

97.52

98.52

Dai A

83.53

58.78

144.25

102.22

Dong A

64.94

73.66

123.90

111.13

Eximbank

54.74

44.01

80.56

68.76

Gia Dinh

51.62

38.71

251.98

209.11

Habubank

40.05

44.55

111.24

94.89

HDBank

64.48

64.61

251.77

142.39

Kien Long

61.42

74.30

141.95

132.19

Military bank

38.71

35.49

64.49

57.95

Mutual savings bank

37.16

34.36

88.59

79.44

Nam Angstrom

51.50

63.31

96.32

109.28

Nam Viet

44.06

50.20

71.06

90.91

OCB

64.29

85.17

130.94

126.50

Ocean

34.45

42.14

194.80

92.62

PG

40.96

38.25

146.17

107.56

Sacombank

54.79

51.15

79.98

75.89

Saigonbank

72.30

70.65

113.87

110.49

SCB

74.97

60.31

121.96

101.35

SHB

33.83

43.48

149.15

65.76

Southern

34.29

45.95

61.53

105.47

Techcombank

51.81

43.83

83.70

65.16

VIB

42.60

56.42

94.67

81.94

Viet A

60.88

63.71

125.94

88.25

Vietcombank

49.41

50.77

68.88

70.89

Vietinbank

61.51

90.68

VP bank

73.26

69.43

104.10

90.68

Western

48.52

51.27

109.78

158.78

MHB

50.58

140.09

Trustbank

72.75

54.32

267.11

80.59

Average

54.09

49.53

114.95

98.76

51.81

106.86

This tabular array illustrates Bankss in Vietnam chiefly invested their money to do loans. Average rate of two old ages is 51.81 % implies loan outstanding ( the lowest liquidness assets of Bankss in Vietnam ) occupied about 52 % entire assets of Bankss. Potentially, Bankss might run into recognition hazard, in peculiar SBV implemented pecuniary policy tightened, consequently returns of Bankss turned down on the land of increasing involvement rate to see liquidness, non to advert adulthood transmutation.

A convenient manner of understanding clearly ratio 4 could be revising ratio 5 which pointed out what rate Bankss made loan from clients ‘ sedimentations. The higher rate affirms the less liquidness of Bankss. As can be seen from statistics, there were 19/32 Bankss conducted loaning over their mobilisation financess, particularly this rate of Gia Dinh, HDBank, Trustbank was over 200 per centum. Average rate of two old ages as calculated is about 107 % . Obviously, profitable assets originated in recognition ( a higher hazard natural assets in comparison to other moneymaking assets ) . The regulators need to be invariably concerned with this phenomenon. Subjectively, this rate should be operated under 100 % to guarantee liquidness.

With BIDV, this ratio was keenly maintained around 65 % is perchance suited to Vietnam ‘s conditions. Quality of recognition had been improved bit by bit, the figure of clients were rated A and above equivalent to 58.9 % of the sum[ 24 ]hence whenever face with liquidity issue, SBV “ official loaners of last resort ”[ 25 ]would supply liquidness to BIDV by imparting against pledge appropriate recognition understandings which accord with SBV ‘s ordinances beside “ collateralized recognition ”[ 26 ]. Along with execution ratio 5 less than 100 would turn BIDV ‘s liquidness steadily.

Ratio 6

Ratio 6=

Table 7: Ratio 6 of Bankss in Vietnam[ 27 ]

Unit of measurement: per centum

Bank

Ratio 6

2007

2008

ACB

2.53

1.03

Agribank

8.75

9.63

An Binh

6.68

BIDV

12.85

12.95

Dai A

1.59

10.99

Dong A

3.18

1.22

Eximbank

16.88

2.63

Gia Dinh

5.47

3.54

Habubank

9.44

14.27

HDBank

0.22

0.32

Kien Long

0

0

Military bank

2.24

19.86

Mutual savings bank

12.35

12.04

Nam Angstrom

3.76

2.60

Nam Viet

0

0.20

OCB

2.52

1.15

Ocean

17.22

27.41

PG

17.71

19.02

Sacombank

17.66

12.67

Saigonbank

0.10

0

SCB

3.64

10.84

SHB

0.07

10.08

Southern

6.66

6.05

Techcombank

17.30

17.69

VIB

17.00

14.03

Viet A

1.30

2.96

Vietcombank

19.22

14.32

Vietinbank

19.91

VP bank

9.98

9.96

Western

0

0

MHB

27.26

Trustbank

0.59

0.12

Average

8.25

8.19

8.22

At a glimpse, table 6 indicates the securities/assets rate of Bankss in Vietnam was non high peculiarly some Bankss non hoarded stocks for liquidity demand such as Kien Long, Nam Viet and Western. It can be seen that Bankss invested more money to stock market in 2008. However, there had been a down tendency in Vietnam ‘s stock market since last 2007, therefore securities became illiquid and its monetary value declined dramatically. As a consequence, stashing more securities non improved Bankss ‘ liquid province even acquiring a loss mention to stock ‘s monetary value dropped, for case, BDIV suffered heavy losingss in stock market in 2007-2008 ( investing to securities made up about 12 % of portfolio ) at ?358.53 million lbs and ?98 million lbs severally. This is an issue which BDIV leaders should mind and amend.

Coming along with cash/assets rate ( ratio 3 ) , securities/assets rate provinces Bankss ‘ instantaneous payment. To unite ratio 3 and ratio 5 is a ratio being every bit likewise as with ( cash+securities ) /assets ratio of US Bankss. Two old ages mean rate of ( cash+securities ) /assets rate in Vietnam was merely 11.97 per centum[ 28 ], it was rather little in comparison with similar ratio of 100 biggest listed Bankss of America ( mean rate was 32 % )[ 29 ]. Obviously, commercial Bankss in Vietnam non reserved the most extremely marketable points ( hard currency and securities ) well in their assets. Is it a job to liquidness of Bankss? May be non, as mentioned before stock market in Vietnam experienced a fickle fluctuation in 2006-2008, coming along with low degree of fiscal market in Vietnam, the securities tend to less liquid than securities in developed states.

The instance of Bank for investing and development of Vietnam ( BIDV )

BIDV ( a state-owned bank ) is one of biggest commercial Bankss in Vietnam and being appreciated extremely in liquidness direction. This portion of paper will analyse widely BIDV liquidness province before reasoning about its liquidness direction.

Figure 1: Deposit growing rate of BIDV in comparing to recognition growing of BIDV and recognition growing rate of banking system[ 30 ]

First, it can be seen that BIDV ‘s directors tend to keep the recognition growing rate of BIDV smaller than this rate of banking sector. Furthermore, they had a high precedence to keep sufficient liquidness on the land of enterprise to run the degree of recognition growing below the rate of sedimentations growing except 2007 when the recognition growing gained a really point at 35.49 % because coming along with other Bankss, BIDV have duty is raise recognition growing extremely due to promote economic system development ‘s policy of the authorities.

Table 8: BIDV ‘s liquidness[ 31 ]

Unit of measurement: per centum ( % )

Index

2003

2004

2005

2006

2007

2008

Outstanding loans/deposits

106.4

107.7

99.6

92.6

97.5

98.5

Liquid assets/Total liabilities

8.2

7.0

5.7

15.9

6.6

7.9

Customer deposits/Total liabilities

72.4

69.6

75.8

69.3

70.3

70.1

Medium and long-term/Total outstanding loans

48.5

45.7

42

43.5

39.8

40.5

Along with aforesaid analyses, set abouting reduced outstanding loans below sedimentations ( less than 100 ) every bit good as dropped medium and long-run around 40 % , at the same time maintained sensible ratio client deposits/total liabilities in comparison with ratio entire outstanding loans/total assetsaˆ¦ Liquidity of BIDV had increased well, it can be said that although there still stay several defect, BIDV had a wise scheme liquidness direction for itself.

To sum up, this paper has given a general position mention to liquidness direction of banking sector in Vietnam in 2007-2008 by measuring several liquidness ratios based on ordinances of SBV and different ratio used by Bankss. Furthermore, analysing briefly the instance of BIDV, it can be said that its liquidness direction scheme likely agreements with its circumstance and a low developing economic system like Vietnam. In my sentiment, to supply a best scheme liquidness direction is a riddle non merely to the directors of bank but besides the economic experts and politic markers. As my cognition, how bank engage in liquidness direction is assorted because each bank has its ain specific state of affairss, developing scheme and resources, bank leaders would establish on ordinances, international conventions to make up one’s mind their scheme liquidness direction. In this on the job paper, although seek our best, we were non able to roll up suited informations running appropriate theoretical accounts to do more clearly the instance of BIDV.

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