CHAPTER 1: OVERVIEW OF RESEARCH ON RISK MANAGEMENT LIVING LIST at commercial banks
1.1. About the organizational structure of risk management of loan portfolio
Regarding the organizational structure of loan portfolio risk management, there are not many studies that specifically address the scope of the loan portfolio, but the existing studies provide the most general principles for building a loan portfolio. credit risk management organization to ensure that this activity is effectively implemented at commercial banks. The following are typical domestic and foreign studies on the organizational structure of risk management of the loan portfolio in terms of two aspects: organizational model and principles of information reporting between parts of the structure. organization.
1.1.1. Research on the organizational model of risk management of loan portfolio
First,In his research on credit risk management at commercial banks, Ghosh (2012) emphasized the need for a separate department in the bank to manage credit risk, in addition to two other key risks: market risk and operational risk, because of the frequency and magnitude of the risk faced by the bank. The organizational structure that the author proposes commercial banks to implement is a centralized credit risk management structure, because according to this study, the above model has separated the risk-taking function. (risk taking) with the function of risk monitoring and control. Besides, the study also evaluates other advantages of this model in credit risk management at commercial banks. This is the theoretical foundation of the standard risk management model, consistent with the trend of modern banking governance included in his research by the author of the thesis. However, the above study also notes that commercial banks consider the characteristics of scale, geographical location, business activities, number of products and services, etc. to provide an organizational model for risk management. suitable credit risk.
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Second , an outstanding credit risk management model introduced by many studies and proven to be highly effective when applied in practice at commercial banks is the "three layers of defense" model. Standard guidelines
Theoretically for this model can be mentioned as IIA (2013), Basel (2015) 5 , Oliver Wyman (2015), PwC (2017). The “three layers of defense” risk management model was first developed by the Institute of Internal Auditors (IIA) in 2013, and has since become the most common standard for organizations to regulate. responsibilities for monitoring and risk management for functional departments. In this thesis, the author inherits the above theoretical arguments about the tasks and functions of defense classes to make an assessment of the current situation as well as propose solutions for the effective implementation of this model in different areas. NHM. TuesdayResearch by Nguyen Duc Tu (2012) on credit risk management at Vietnam Joint Stock Commercial Bank for Industry and Trade has theoretically given two types of popular models about the organizational structure of credit risk management in Vietnam. Commercial banks are a centralized credit risk management model and a distributed credit risk management model. In addition, this study also identifies the factors that affect the choice of credit risk management model at commercial banks, including: credit risk management orientation, bank size, technology level and presentation. manpower level. However, the above study has not shown the actual situation of applying these credit risk management models at commercial banks, this is a different aspect of the research objectives in this thesis with the above work. However, the thesis inherits the theories in this study on the characteristics as well as advantages,
Fourth , the scientific work of Le Thi Huyen Dieu (2010) on the scientific argument in determining the credit risk management model at Vietnamese commercial banks. This is considered the most comprehensive study on the contents related to the credit risk management model at commercial banks to date, including: concept, model classification, application conditions, international experience in the application of
5 In this study, the “four layers of defense” model is proposed, but this model emphasizes the role of the relationship between the third and fourth layers of defense, i.e. the role of the supervisory and control department. control inside and outside the bank. For the purpose of studying the organizational structure inside commercial banks in terms of credit risk management, the thesis focuses on the "three layers of defense" model.
model form, the actual application of models in Vietnamese commercial banks through surveying 40 banks in the system and recommendations and proposals in implementing the models in practice. According to this author's research, the centralized credit risk management model is the most suitable and superior in credit risk management across the bank to ensure the implementation of policies on credit risk management. Credit risk is comprehensive, long-term and competitive. However, the author also provides conditions for the effective implementation of this centralized credit risk management model at Vietnamese commercial banks such as information technology, human resources, capital, responsibilities in the management system. So, This study is consistent with previous theories on the superiority of the centralized credit risk management model in improving the effectiveness of credit risk management. Therefore, the thesis applies this practical research to serve as a basis for determining the standard model of risk management of loan portfolio, thereby making an assessment of the current situation and proposing necessary solutions for the loan portfolio. Vietnamese commercial banks.
Thursday,Research by Viet Dung (2007) on types of risk management organizational models in banks. This study focuses on analyzing the balance between risk management roles and responsibilities at the Head Office level and of risk management units located within the branch with respect to credit risk and market risk. school. The research results give the overall conclusion that there is no single model of credit risk management organization that is suitable for all commercial banks. characteristics and requirements of the bank. However, the basic principles in the design of the model to be followed are: (i) the risk management unit must be independent from the risk acceptor, (ii) the Risk Management Council/Management Division Risk management should be authorized by the Executive Board to manage and control credit risk. Besides that, This author emphasizes the establishment of risk management and control organizational models at the head office level, in addition to risk monitoring and control in business units. However, the head office level focuses on credit risk control on issues such as:
strategic issue, while the business unit level controls credit risk in day-to-day lending operations. Thus, this study gives suggestions on the design and application of organizational structures for credit risk management in line with the diverse realities in lending activities of commercial banks. Theory for the author of the thesis to make an assessment of the current situation and to build a solution group on the organizational structure of risk management of the loan portfolio at Vietnamese commercial banks.
1.1.2. Research on principles of information reporting between departments in the organizational structure of risk management of loan portfolio
First,Ghosh (2012) in his study pointed out the principle of designing the reporting flow to separate reports on business management and reports on risk management. In addition, according to this author, commercial banks should make clear regulations on the duties of each department participating in operational activities and risk management activities to avoid overlapping and conflicting interests of the banks. this part. In addition, empirical research by Vincent, Gabriele and Markus (2012) on the influence of the reporting process on the effectiveness of risk management, including credit risk at commercial banks, has shown that, at Commercial banks where the Chief Risk Officer (CRO) reports directly to the Board of Directors (BOD) demonstrate more effectiveness in risk management, especially during periods of operational crisis. Credit, compared to CRO models that report directly to the Bank's Chief Executive Officer (CEO). This result is consistent with the theoretical explanation that there is often a conflict of interest between the CEO and the CRO of the bank. Thus, the design of the reporting process is an important element in the design of the organizational structure of credit risk management, so the thesis uses the above reporting principles theory as a content to analyze. Analyze and evaluate the current situation of the organizational structure of risk management of the loan portfolio at commercial banks.
Second , Viet Dung (2007) through an empirical survey at Vietnamese commercial banks also made recommendations that commercial banks should ensure a clear division between
clear responsibilities and reporting channels for performing day-to-day credit risk management tasks. This reporting principle is as follows:
Risk Management Council
Risk control department at the branch
Figure 1.1: Reporting principles on credit risk management
Source: Viet Dung (2007) This is considered a recommendation suitable for the operation of large-scale commercial banks in Vietnam today. Therefore, the author of the thesis inherits the above principle to give appropriate assessments and solutions for each group of commercial banks in the study.
1.2. About loan portfolio risk identification
1.2.1. Research on early warning of credit risk
Regarding the group of studies on risk identification method through early warning of credit risk, there are many works including research on methodology and research on practical effectiveness when applying credit risk. used in credit risk management at commercial banks in different countries.
Firstly, about the research related to the methodology in building the credit risk early warning system at commercial banks. Some case studies are as follows:
Research by Gramlich et al (2010); Zhou, Wang and Qiu (2008); Davis and Karim (2008). The above studies provide a system of models and methods used in the design of an early warning system for credit risks at banks such as the method based on supervisory authority, the Monte Carlo method, the Predictive models, Discrete event simulation, Logit...
Research by Nguyen Van Huan and Do Nang Thang (2018) on building credit risk reporting models at Vietnamese commercial banks. This group of authors use Logistic model (Maddala, 1983) to predict the probability of customer default. This model is considered by the authors to be easy to apply to commercial banks because it is quite popular using SPSS software. However, in this study, the authors only consider individual borrowers, moreover, they have not considered the entire loan portfolio, but only stopped at predicting credit risk for each individual customer. loan amount.
Research by Nguyen Thi Lan and colleagues (2018) with the same methodology as the work above, has provided simulation application of the Logistics model with the addition of two methods: linear difference analysis calculator (LDA) and support vector machine (SVM) in early warning of the risk of default of Vietnamese joint stock commercial banks. In addition to providing predictive results on the credit risk of borrowers, the methodology of this authors also provides an assessment of the accuracy of the models used in risk forecasting. In the opinion of the authors, the application of the above models in practice at commercial banks is completely feasible.
In this thesis, the author does not focus on how to design and build an early warning system for credit risk at commercial banks as the studies given above. Instead, the thesis focuses on introducing this system as a theoretically effective method in risk management of loan portfolios, based on which to test the reality and make an assessment of the creditworthiness. the effectiveness of this system on as well as making the necessary recommendations. Therefore, the thesis applies the results from studies on the effectiveness of the credit risk early warning system at commercial banks in different countries.
Secondly, about the effectiveness in practice when applying the credit risk early warning system at commercial banks. The role and effectiveness of this system in identifying credit risk at commercial banks has been clarified in many studies for commercial banks in different countries such as: Azam (2016) in Iran; Qin and Luo (2014)
in the group of developed countries G20; Koyuncugil and Ozgulbas (2012) in Turkey; Tiberiu (2006) in Romania; Sahajwala and Bergh (2000) in the G10 group of developed countries. These studies all draw conclusions about risk early warning as a reliable method to identify credit risk on a bank's loan portfolio.
1.2.2. Research on methods of assessing loan portfolio quality in the past
Regarding research on methods of assessing loan portfolio quality in the past such as: trend analysis method (Trend report), displacement analysis method (Migration analysis), Vintage analysis method (Vintage) analysis)… is not much. With the group of foreign works, the method focused on research is Vintage analysis. This method proved to be quite effective as Siarka (2011), Zhang (2009), Breeden (2004), Burns and Stanley (2001)... put in their work. Among these is the research of Siarka (2011), the author has made a quite comprehensive study on Vintage analysis technique including the concept, interpretation of the results of the analysis and the benefits of this technique. for the process of re-accrediting the credit portfolio as recommended in the new Basel accords. In addition, The above author also discusses the limitations of this method in the implementation of credit risk management at commercial banks. These are the background studies for the author to include in his thesis on the theoretical content and actual situation of risk identification on the loan portfolio at commercial banks.
In addition, with a group of domestic projects conducting research on methods used to identify credit risks through assessing the quality of loan portfolios in the past, only Pham's work is currently available. Thi Nuong (2013). With the study of the displacement analysis method, the author has provided an empirical analysis and built a credit rating model to warn of the risk of debt group shifting with loans of corporate customers at commercial banks. Vietnamese Art. Research has shown how
method of building credit rating model using hierarchical variable regression method; thereby calculating the trend of debt group shifting if the bank's policy is changed, and at the same time providing an approach so that the bank can be more closely related to the weak points of customers. This is a highly practical and verifiable study when assessing the current status of the internal credit rating system being implemented at the research commercial banks, thereby recommending the model type in forecasting the transferability. debt groups can overcome the limitations in the current system being applied at the bank.
1.3. About measuring loan portfolio risk
In terms of risk quantification, compared with the risk index methods (KRI), the standard method (SA) and the method based on internal credit rating (AIRB, FIRB) recommended by Basel, the group of Predictive methods of future portfolio risk have been studied by more authors, and one of them is Saunders and Allen (2010). This group of authors introduced modern approaches to credit risk measurement in general, including credit risk on loan portfolios through models using mathematical statistics by groups. : (i) model group that considers a loan as an option contract: KMV model and other Moody's models, (ii) reduced model group: KPMG's loan analysis system and model Kamakura's credit risk management,
(iv) model group following the macro simulation approach: CreditPortfolio View model and others, (v) model group following the insurance approach: bankruptcy model and Credit Risk Plus model. In addition, the above authors provide more general theories on credit derivatives as a tool to manage credit risk on the portfolio. This is a fairly in-depth and comprehensive study in terms of credit risk quantification, but in their study, the authors only mentioned and did not discuss other contents of loan portfolio management. . In other words, the above authors only focus on the aspect of risk measurement, a content