Dang Thu Huong (MBA) Implementation Manager, Head of R&D

INTERNAL MANAGEMENT ISSUES IN VIETNAM BANKS

Agenda
Reasons for internal management in Banks Scope of internal management Internal management issues in VN Banks Suggestions for an effective internal management in VN Banks

Banking.org.vn

Agenda
Reasons for internal management in Banks Scope of internal management Internal management issues in VN Banks Suggestions for an effective internal management in VN Banks

Banking.org.vn

 After being member of WTO, enterprise internal management has been arose as a critical requirement for VNs economy development A healthy internal management brings about a sustainable growth, particularly in financial institutions which have high risks and impacts to the economy

Banking.org.vn

 A bank having weak internal management not only make loss to itself but also result in consequent risks to other entities and stakeholders The world economy downturn since the year 2008 resulted from the failure of internal management in general and credit risk management in particularly of the banking system

Banking.org.vn

 A recent survey conducted by KPMG and the Economist Intelligence Unit: weaknesses in risk culture and governance, gaps in risk expertise at the non-executive board level, lack of influence of the risk function, lack of responsibility and accountability on the part of those on the front line, a compensation culture too oriented toward year-on-year profit increases, and business models that were overly reliant on ample market liquidity.
(Source: Risk Management in Banking: Beyond the Credit Crisis, Jrg Hashagen, Nigel Harman, Michael Conover, Jitendra Sharma. The Journal of Structured Finance, Spring 2009, Vol. 15, No. 1: pp. 92-103 )

Banking.org.vn

Agenda
Reasons for internal management in Banks Scope of internal management Internal management issues in VN Banks Suggestions for an effective internal management in VN Banks

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 Internal management affects the Risk Appetite of banks which is the measure of the resistance ability to fluctuation of the economy
Credit Risk Financial Risk Market Risk Interest Rate Risk Liquidity Risk NonNon- Financial Risk Operational Risk Business/Management Risk
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Default Credit migration Correlation Volatility Exposure Cash flow

Operation event Process/People System/External Reputation Strategy

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 Which does the internal management cover?

Risk management
Credit Risk, Market Risk, Operational Risk, ALM

Performance management
FTP, Profitability, Cost allocation, Budgeting, Accounting management, Financial management, ERP, Fixed Assets

Governance and Compliance

AML, Capital adequacy , Reporting regulatory

Human Resource
Operation/Procedures, Code of conduct
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Banking.org.vn

Agenda
Reasons for internal management in Banks Scope of internal management Internal management issues in VN Banks Suggestions for an effective internal management in VN Banks

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Banking.org.vn

The risk management framework in banking in Vietnam is still in the initial stage where banks are beginning to review their risk management structure
According to Mr Tim Aman, Head of the Financial Services practice at KPMG in Vietnam

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Banking.org.vn

1. Lack of a legal framework for the internal management Revised Law on Credit Institutions (2004), Revised Enterprise Law (2005) No article directly regulating the internal management activities Banks have to based on some Degrees to establish the management mechanism
Decision 37/2006/QD-NHNN on establishment of Internal audit unit Degree 59/2009/ND-CP on 16 July 2009 on organization and operations of Commercial Banks
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2. Inappropriate managerial and organizational structure Roles and responsibilities of BOD and Senior management are overlapped in some banks Business departments in HO and Branches are segregated by business and geographic Lack of a proper conjunction among activities, weak decision making process among the units.

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Banking.org.vn

3. Inappropriate attention to risk management and compliance

Internal Audit (IA) function: A Survey of PricewaterhouseCoopers VietNam with 30 banks including foreign and local banks, of which 90% established more than 10 years
Lack of a clear and long term strategy for internal audit; 41% of respondents: the banks not yet have IA procedures. 78% of respondents: the banks having overlaps among roles and responsibilities of the IA and inspection functions. Inappropriate understanding on IA roles 80% of respondents: in the view of external auditors the internal audit report is only fairly important or not important Credit and Accounting are the two that IA spends the most time (52% in total) while an average of 7% of time spend for each remaining like card center, payment center or treasury. 30% of the banks not yet conduct internal audit on IT activity Insufficient resource for internal audit and internal control; no proper supporting 15 tool for Internal auditors (standardized reporting system, IT support)
Banking.org.vn

3. Inappropriate attention to risk management and compliance

Lack of a risk management framework and proper policies in line with business objectives and overall strategy of the banks

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Banking.org.vn

Agenda
Reasons for internal management in Banks Scope of internal management Internal management issues in VN Banks Suggestions for an effective internal management in VN Banks

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Banking.org.vn

In times of economic challenging, as we are seeing now, it is critical that banks must have good systems and processes for assessing and managing their risks

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Risk management Strategy

Integrate the risk management and business strategy to arrive at the right model to support the current and expected challenges

Risk Organization Governance Risk management process

Identification

Assessment

Measurement

Monitoring & Reporting

Risk control & Mitigation

RISK MANAGEMENT SYSTEM AND RISK CULTURE

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Banking.org.vn

1. Improve internal management capabilities Better risk management mindset of the BOD and BOM to arrive at a clear plan of action on implementing the risk management model Establish an integrated framework for managing risks with effective support of technology, processes and people in line with the predefined risk management strategy

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Banking.org.vn

2. Establish an appropriate managerial and organizational structure Clear roles of BOD and the Senior Management Proper involvement of lines of defense
Business lines Risk management Dept, ALCO Audit department

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Banking.org.vn

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3. A proper legal framework There should be a set of Law on Internal management for Enterprises and Credit Institutions as particularly replacing some relating scattered degrees and decisions Enhance roles and responsibilities of the Banking Inspection and Supervisory body in supervising banking activities as well as consulting and assisting the State Bank Governor in his management activities of financial and credit institutions
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Keynotes:
Although it is the initial stage, VN Banks and financial institutions now all understand that Internal Management in Banks affects not only value but position and prestige of the Banks. Cause the exposures to various risks varies from banks, a banks approach to risk management should be tailored to meet their different requirements. Some banks are turning to international advisory firms for help in bringing in best practices in globally proven risk frameworks together with implementation of robust processes and IT systems to support the policies.
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Banking.org.vn

However, there are many prerequisites to a technology solution. The right tone at the top, the right governance with clear roles and responsibilities, and clearly defined processes must be identified for the right technology solution to support the risk management initiatives for effective internal management.

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 Thanks for your attention!

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