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- MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM
BANKING UNIVERSITY HOCHIMINH CITY
*****
TRAN CHI CHINH
USING DERIVATIVES IN CREDIT RISK MANAGEMENT
AT VIETNAMESE COMMERCIAL BANKS
SUMMARY OF DOCTORAL THESIS
Major: Finance - Banking
Code: 9.34.02.01
Scientific instructors: Assoc. Prof., Dr. Nguyen Thi Nhung
HOCHIMINH CITY – 2022
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DISSERTATION SUMMARY
In the context of Vietnamese commercial banks are in the process
of fundamental and comprehensive restructuring of banking business;
In which, for credit risk management, Vietnamese commercial banks
also need to have a comprehensive innovation, especially innovation
based on the standards of Basel II and Basel III. The emergence of
credit derivatives not only provides commercial banks with new tools
to invest, prevent and minimize credit risk, concentrate or diversify
loan portfolios, but also creates a new mechanism for proactive
management of credit risk. In fact, Vietnamese commercial banks
have used credit derivatives in credit risk management since 2006, but
up to now, the use of this tool in credit risk management at
Vietnamese commercial banks is still very limited. The goal of the
dissertation is to analyze the current situation of using credit
derivatives, explore conditions and propose solutions to improve the
conditions for using credit derivatives in credit risk management at
Vietnamese commercial banks. To achieve this research goal, the
Ph.D. student has chosen a qualitative research approach based on the
grounded theory (GT) method. Regarding data, the Ph.D. student uses
a combination of three types of data: secondary data, primary data
through surveys, and primary data through in-depth interviews with
11 experts who are leaders of 11 Vietnamese commercial banks.
Regarding the data analysis procedure, besides the comparative
statistical analysis method, the Ph.D. student also applied the GT-
based data analysis procedure to deploy. In addition to reflecting the
current situation of using credit derivatives in credit risk management
at Vietnamese commercial banks, research results have formed a
model of conditions for using this tool in credit risk management –
including five conditions with 12 observed variables; and at the same
time provide evaluation criteria for the response to each observed
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variable through identification signs. Futhermore, the results of the
study also analyze and evaluate the completion of conditions for using
credit derivatives in credit risk management at Vietnamese
commercial banks; at the same time, propose four groups of solutions
and two recommendations to improve the conditions for using credit
derivatives tools in credit risk management at Vietnamese
commercial banks.
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INTRODUCTION
1. Reasons for choosing the topic
Vietnam is in the process of fundamental and comprehensive
restructuring to develop a system of credit institutions in general and
a system of commercial banks in particular, which is multi-functional
towards modernity, safe and effective operation solid results, greater
competitiveness thanks to the foundation of advanced banking
technology and governance, in line with international practices and
standards. In particular, for credit risk management, Vietnamese
commercial banks must have a fundamental and comprehensive
innovation, especially the innovation that is approached based on the
standards of Basel II and Basel III.
The appearance of credit derivatives not only provides
commercial banks with new tools to invest, hedge against credit risk,
minimize them, concentrate or diversify loan portfolios. The
emergence of credit derivatives also creates a new mechanism for
proactive management of credit risk. To comprehensively innovate
on credit risk management in lending activities; one of the ways that
Vietnamese commercial banks can approach is to apply the risk
model of "originate-to-distribute" proactively through the use of
credit derivatives.
According to the research of the Ph.D. student, although there
have been many studies related to the use of credit derivatives tools
in credit risk management at commercial banks, these studies are
mainly conducted in developed countries - where the credit
derivatives market has formed and developed, and where commercial
banks have achieved high development in credit risk management. In
Vietnam, there have also been several studies on this topic – a study
by Le Ho An Chau (2006), "Talking about some necessary conditions
for developing the credit derivatives market in Vietnam"; Huynh Thi
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Huong Thao and Bui Nguyen Kha (2014) "Study on factors affecting
the application of credit derivatives in Vietnamese commercial
banks"; Tran Chi Chinh (2019) "Using the credit derivatives swap in
credit risk management at Vietnamese commercial banks". However,
these studies have only given some suggestions regarding the
conditions for the formation and development of the credit
derivatives market in Vietnam or have just approached the conditions
for using the credit derivatives market, credit derivatives tools in
credit risk management in some individual aspects. Therefore, the
dissertation chose the thesis topic "Using derivatives in credit risk
management at commercial banks in Vietnam" to analyze the current
situation of using credit derivatives tools, explore the conditions for
using them in credit risk management at commercial banks in
Vietnam – conditions suitable for the economic context like Vietnam.
Thereby assessing the completeness of the conditions, and at the
same time providing solutions and recommendations to improve the
conditions for credit derivatives in credit risk management at
Vietnamese commercial banks.
2. Objectives and research questions
▪ General Research objective
The research objective of the topic is to analyze the current
situation of using the credit derivatives tool, explore the conditions,
and propose solutions and recommendations to improve the
conditions for using the credit derivatives tool in credit risk
management at Vietnamese commercial banks.
▪ Specific objectives and research questions
With the above general research objectives, the specific
objectives and related research questions are established by the
author as follows:
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- Research objective 1: Analyze the current situation of using
credit derivatives tools in credit risk management at Vietnamese
commercial banks; The research questions for this purpose are:
+ Research question 1: What is the current status of credit risk
at Vietnamese commercial banks?
+ Research question 2: What is the current status of using credit
derivatives and other credit risk transfer tools in credit risk
management at Vietnamese commercial banks today?
- Research objective 2: Explore the conditions for using credit
derivatives in credit risk management at Vietnamese commercial
banks; The research questions for this goal are:
+ Research question 3: To be able to use credit derivatives in
credit risk management, what conditions do Vietnamese commercial
banks need to meet? Furthermore, which observed variables are they
evaluated?
+ Research question 4: What is the reality of completing the
conditions for using credit derivatives in credit risk management at
Vietnamese commercial banks today?
- Research objective 3: Proposing solutions and
recommendations to improve the conditions for using credit
derivatives in credit rish management at Vietnamese commercial
banks; The research questions for this goal are:
+ Research question 5: To complete the conditions for using
credit derivatives in credit risk management, which groups of
solutions should Vietnamese commercial banks need to implement?
+ Research question 6: To improve the conditions for using
credit derivatives tools in credit risk management, what groups of
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solutions and recommendations should the state management
agencies of Vietnam implement?
3. Research subjects
The research object is the use of credit derivatives in credit risk
management at commercial banks. The focus is on discovering the
conditions for using credit derivatives in credit risk management at
Vietnamese commercial banks.
4. The scope of the study
The research scope of space: Research topic at Vietnamese
commercial banks.
The research scope of time: To serve the research content, The
Ph.D. student use three types of data: secondary data collected
through published reports and documents public – collected between
2016 and 2020; Primary data was collected through a survey of
leaders, credit appraisers/credit risk managers of Vietnamese
commercial banks – conducted by Ph.D. student in the period from
October 2019 to December 2019; and primary data were collected
through in - depth - interviews with leaders of Vietnamese
commercial banks - conducted by Ph.D. student during the period
from October 2020 to November 2020.
5. Methodology
To carry out the research topic "Using derivatives in credit risk
management at Vietnamese commercial banks", the Ph.D. student
has chosen a qualitative research approach based on the GT method.
Because as stated in the research gap section, because of the lack of
theory on the conditions for using credit derivatives in credit risk
management at commercial banks, especially the right conditions
suitable with the characteristics of a developing country like
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Vietnam. Therefore, this is a new research problem, but there is
almost no quantitative data on credit derivatives in Vietnam.
To achieve the research goal of the thesis through a qualitative
research approach based on the GT method. In addition to applying
comparative statistical analysis to process secondary and primary
data collected through surveys; The dissertation also applied data
analysis procedures based on the GT method for primary data
collected through in-depth-interviews with experts.
6. Research contributions
The research results of this thesis have the following theoretical
and practical contributions such as:
Theoretically, academically: The research results of the thesis
have developed a model of conditions for using credit derivatives
tools in credit risk management at Vietnamese commercial banks -
includes five conditions with 12 observed variables, and at the same
time gives the identification signs used to evaluate the response to
each observed variable in terms of qualitative.
In terms of practice: The research results of the thesis, in addition
to showing the current status of using credit derivatives in credit risk
management at Vietnamese commercial banks, reflect the current
situation of the completion of conditions for using credit derivatives
in credit risk management at Vietnamese commercial banks. This
helps the managers of Vietnamese commercial banks have more basis
in building a roadmap to deploy modern credit risk management
models in line with international practices and standards. They also
help policymakers provide appropriate orientations and solutions to
support and monitor credit risk management activities of Vietnamese
commercial banks.
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7. Thesis structure
Besides the introduction and conclusion, the content of the thesis
is structured into five chapters, with the following contents:
Chapter 1. Overview of previous studies
Chapter 2. The theoretical basis of using credit derivatives in
credit risk management at commercial bank
Chapter 3. Methodology
Chapter 4. The reality of using credit derivatives and conditions
for using credit derivatives in credit risk management at Vietnamese
commercial banks
Chapter 5. Solutions and recommendations to improve conditions
for using credit derivatives in credit risk management at Vietnamese
commercial banks
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CHAPTER 1. OVERVIEW OF PREVIOUS STUDIES
1.1. Overseas and domestic studies
1.2. Research approaches and research gaps
1.2.1. Research approaches
The studies presented above show that using the credit derivatives
tool in credit risk management at banks. The authors have mentioned
many different approaches. Besides the benefit and risk approach, the
motivation for using credit derivatives, with efforts to find solutions to
improve benefits, limit risks for subjects using credit derivatives tools,
and improve publicity and transparency in order to limit risks to activities
related to credit derivatives, many authors have approached the research
direction on conditions and solutions to limit the problem of moral hazard
of the buyer or seller of credit derivatives.
1.2.2. Research gaps
From the review of previous studies in the above section, it can be
seen that the studies on the topic related to the use of credit derivatives
tools in credit risk management at commercial bank have been reviewed
by the authors. They are mentioned with many different approaches.
Besides the benefit and risk approach, the motivation for using credit
derivatives; with efforts to find solutions to improve benefits, limit risks
for subjects using credit derivatives tools, and improve publicity and
transparency in order to limit risks to customers. In activities related to
credit derivatives, many authors have approached the research direction
on conditions and solutions to limit the moral hazard of the buyer or seller
of credit derivatives. Regarding the methods used by the authors to do
research related to these topics, they are also quite diverse. In addition to
using theoretical economic models combined with econometrics, many
authors have used qualitative, quantitative, or mixed methods. Although
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the results from previous studies are pretty diverse – both in terms of
research approaches and research methods, there are still theoretical gaps.
Firstly, studies on the use of credit derivatives tools in credit risk
management at commercial banks are mainly carried out in developed
countries such as the US and countries in Europe. This is where the credit
derivatives market has formed and developed. This is also the place
where commercial banks have enjoyed high development in credit risk
management and where the financial market's infrastructure is quite
developed – in terms of legal, database systems, and information
technology. Meanwhile, some of these features are not present in
developing economies - including Vietnam.
Secondly, the research aims to find solutions to limit risks for parties
participating in the purchase or sale of credit derivatives or the conditions
for using credit derivatives in credit risk management; they are mostly
separately approached by the authors - focusing only on the conditions
and solutions related to the use of credit derivatives by entities
participating in buying or selling credit derivatives; or conditions and
solutions related to the improvement of the legal system, inspection and
control of activities on credit derivatives by state management agencies.
In a developing country like Vietnam - where the credit risk management
of commercial banks is not highly developed, where the activities for
credit derivatives are still quite limited. For commercial banks to
effectively use credit derivatives in credit risk management, it is
necessary to have more theory about the conditions for using credit
derivatives in credit risk management. Using at commercial banks is
approached as a whole – including conditions belonging to the internal
resources of commercial banks and conditions relating to the operating
environment related to the use of credit derivatives tool in credit risk
management of commercial banks.
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From the gap in previous studies, the Ph.D. student decided to choose
the topic "Using derivatives in credit risk management at Vietnamese
commercial banks" to analyze the tool's actual situation, explores the
conditions for using the credit derivatives tool in credit risk management
at Vietnamese commercial banks. In addition, to have a basis for
proposing solutions and recommendations, the author evaluated the
completion of the conditions for using credit derivatives in credit risk
management at Vietnamese commercial banks
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CHAPTER 2. THE THEORETICAL BASIS OF USING CREDIT
DERIVATIVES IN CREDIT RISK MANAGEMENT AT
COMMERCIAL BANK
2.1. Overview of credit risk management at commercial bank
2.2. Credit derivatives overview
2.2.1. General concept of derivatives
The definition “Derivatives are financial contracts whose value is
derived from the value of the underlying asset” (Madura, 2015, p. 341).
In the banking business, financial derivatives are business or
investment products and tools for banks to manage credit risk and market
risk. In particular, interest rate derivatives are valuable tools for banks in
managing interest rate risk (Chorafas, 2008; Gottesman, 2016; Choudhry,
2018). With foreign currency derivatives, they are helpful tools for banks
in managing exchange rate risk (Saunders and Cornett, 2008; Madura,
2015; Mishkin and Eakins, 2018). With derivatives, they are helpful tools
for banks in managing the risk of equity or debt securities (Kolb and
Overdahl, 2010; Hull, 2018). With credit derivatives, they are helpful for
banks in managing credit risk (Das, 1998; Bessis, 2015; Hull, 2018).
Financial derivatives are playing an increasingly important role in
the banking business because their presence gives banks more
opportunities to develop new products and gives banks more tools to
manage risks – financial derivatives can help banks take on or transfer a
variety of risks with other partners. If the purpose of banks is to use
financial derivatives to manage credit risk, financial derivatives are used
by banks, they are credit derivatives.
2.2.2. The concept and characteristics of credit derivatives
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The definition “Credit derivatives are financial instruments whose
settlement is linked to some change in the credit quality of the issuer or
group of issuers” (Caouette et al. , 2008, p. 411).
2.2.3. Credit derivatives
Types of credit derivatives currently used in developed countries
world are pretty diverse; but to manage credit risk for lending activities,
banks often use types of credit derivatives such as Credit default swap
(CDS), Total return swaps (TRS), Credit spread options (CSO) (Servigny
and Renault, 2004; Caouette et al., 2008; Hull, 2018).
2.3. Using credit derivatives in credit risk management at
commercial bank
2.3.1. The underlying theories related to credit derivatives in credit risk
management
When researching the use of credit derivatives in credit risk
management at banks, the authors often approach the underlying theories,
these are the theory of risk and insurance mentioned by Willett (1951);
asymmetric information theory mentioned by Akerlof (1970); agency
theory was mentioned by Ross (1973), then further developed by Jensen
and Meckling (1976).
2.3.2. Benefits and risks of using credit derivatives in credit risk
management
Benefits: As a credit risk transfer tool, credit derivatives is a helpful
tool for hedging, minimizing risk, concentrating, or diversifying loan
portfolios. In addition, credit derivatives is also a tool for pricing loan and
a tool for proactive management of the loan portfolio (Das, 1998;
Caouette et al., 2008; Norden et al., 2014; Bessis, 2015).
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Risks: Using credit derivatives, banks may face counterparty risk,
model risk, payment risk, operational risk (Neal, 1996; Chance and
Brooks, 2015).
2.3.3. Conditions for using credit derivatives in credit risk management
at commercial bank
In order to use credit derivatives tools effectively in credit risk
management at commercial banks, it is necessary to meet the following
conditions: the development of credit risk management, the development
of human resources of banks. The state management of credit derivatives,
the development of the financial market, the development of the entities
involved in providing financial services support for activities on credit
derivatives.
2.3.4. Decoding the losses of some financial institutions around the world
and lessons learned on using credit derivatives in credit risk management
of commercial banks
The brief history of the formation and development of the world
credit derivatives market shows that, in the process of mobilization and
development, in addition to the growth in size, the credit derivatives
market has also changed bout the nature of the market – instead of using
credit derivatives to manage credit risk, more and more actors are
engaged in buying or selling credit derivatives for investment or
speculative purposes. Therefore, to enhance benefits and limit risks when
Vietnamese commercial banks use credit derivatives in credit risk
management, it is necessary to define specific risk limits. Obviously, it is
necessary to build a highly effective one and efficient risk management
system.
Conclusion chapter 2
Based on the synthesis of theory and practice related to credit risk
management and use of credit derivatives tools in credit risk management
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at commercial banks, Ph.D. student has formed a framework theory of
the thesis is in chapter 2.
Some new points mentioned in Chapter 2 are: First, to synthesize five
conditions to effectively use credit derivatives in credit risk management
at commercial banks. Two lessons have been drawn from using the credit
derivatives tool in credit risk management for Vietnamese commercial
banks, that is necessary to identify specific and clear risk limits. At the
same time, it is necessary to build a highly effective and efficient risk
management system.
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CHAPTER 3. METHODOLOGY
3.1. Research approach and research process
3.1.1. Research approach
The review of previous studies presented in the above section
shows the methods used by the authors to research credit derivatives in
general, using credit derivatives tool in credit risk management at
commercial banks in particular. They are pretty diverse – using a
theoretical economic model combined with econometrics, qualitative,
quantitative, or mixed methods. However, in addition to analyzing the
current situation of using credit derivatives, the main objective is to
discover the conditions for using credit derivatives in credit risk
management at commercial banks Vietnam. This is a new research issue,
but there is almost no quantitative data on credit derivatives in Vietnam.
Therefore, to research this topic, The Ph.D. student has chosen a
qualitative research approach based on the GT method according to the
research guidelines mentioned by many authors such as Glaser and
Strauss (1967), Crobin and Strauss (2008), Taylor et al. (2016), Bryant
(2017), Creswell and Creswell (2018), Tie et al. (2019).
3.1.2. Research process
Starting from the objectives, objects, and scope of the research
identified above, with a qualitative research approach based on the GT
method, the research process of the thesis judgment is as follows:
Step 1. Preliminary data collection: Based on the objectives, objects,
and research scope of the thesis. The Ph.D. student who identifies data
types, data sources, collect preliminary data including scientific articles,
books, legal documents, annual reports of the State Bank of Vietnam,
audited financial statements and annual report of Vietnamese commercial
banks, other documents related to the research topic of the thesis -
secondary data.
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Step 2. Analyze and synthesize secondary data to form the theoretical
basis of the thesis: From the preliminary data collected in step 1 –
scientific articles, books which the Ph.D. student conduct analysis and
synthesis of data to form the theoretical basis of the thesis on the use of
credit derivatives tool in credit risk management at commercial bank.
Step 3. Primary data collection: Based on the research objectives,
objects, and scope of the thesis, with the theoretical basis built-in step 2,
a qualitative research approach based on the GT method. The Ph.D.
student surveyed leaders, credit appraisal staff, and credit risk managers
(collectively referred to as appraisers) at Vietnamese commercial banks
– the tools used were questionnaires and closed survey responses. The
results obtained from this survey help to have more information to assess
the status of using tools in the process of credit risk management at
Vietnamese commercial banks. They also help the Ph.D. student select
experts to participate in the interview using the method of theoretical
sampling - the people selected for the interview are experienced leaders
of Vietnamese commercial banks, highly specialized knowledge in credit
risk management. They have a deep understanding of credit derivatives.
In addition, to achieve the thesis's research objective, a qualitative
research approach based on the GT method, with a list of experts
participating in the interviews selected. Ph.D. student conduct in-depth-
interviews with each expert on issues related to the use of toos in the
process of credit risk management, conditions for using the credit
derivatives tool in credit risk management at Vietnamese commercial
banks – the tool used is an in-depth-interview through a semi-structured
open discussion questionnaire.
Step 4. Data analysis and evaluation: Secondary data collected from
relevant newspapers, legal documents, and primary data collected from
appraiser survey results and in-depth-interviews with experts. The
theoretical framework built in step 2 combines a qualitative research
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approach based on the GT method. The Ph.D. student conducts data
analysis to assess the current status of credit derivatives in credit risk
management at Vietnamese commercial banks. In addition, The Ph.D.
student also performs data analysis and comparison, combines their
shared characteristics in each respect, performs coding and
conceptualization, summarizes and develops theories about the data
conditions to use the credit derivatives tool in credit risk management at
Vietnamese commercial banks. Specifically, based on the theoretical
basis related to the conditions for using the credit derivatives tool,
combined with data obtained from expert interviews, through data
analysis procedures based on the evolved GT method, the Ph.D. student
has formed a model of the conditions for using credit derivatives in credit
risk management at Vietnamese commercial banks. In addition, to have
a basis for proposing solutions and recommendations. The Ph.D. student
also made a general assessment on the completion of conditions for using
credit derivatives in credit risk management at Vietnamese commercial
banks.
Step 5. Proposing solutions and recommendations: The theoretical
basis built-in step 2, combined with the analysis and evaluation contents
in step 4. The Ph.D. student proposes solutions and recommendations to
improve the conditions for using credit derivatives in credit risk
management at Vietnamese commercial banks.
3.2. Methods of data collection and data analysis
3.2.1. Secondary data collection and analysis
To research relevant contents in the thesis; in addition to primary
data, the Ph.D. student also collects secondary data, which are documents
related to the research problem of the thesis (shown in table 3.1).
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Table 3.1. Types of documents and sources for secondary data
No. Types of documents Sources Purpose of analysis
Legal documents of Vietnam
1 related to the research Websites of the - Evaluation of the
content of the thesis Government, the State current situation of
Bank, and other using credit derivatives
tools in credit risk
Annual report of the State Ministries of Vietnam
2 management at
Bank Vietnamese commercial
banks.
Audited financial statements
Website of Vietnamese - General assessment of
and annual reports of
3 commercial banks, the completion of
Vietnamese commercial
CafeF conditions for using
banks
credit derivatives in
credit risk management
Other types of reports related at Vietnamese
Websites of relevant
4 to the research contents of commercial banks.
Ministries and Sectors
the thesis
Sources: The Ph.D. student synthesized from the results of the document
collection
After the documents are collected, based on the theoretical basis
built, a qualitative research approach is based on the GT method. The
Ph.D. student reads, notes, analyzes, and compares by making comments
and assessments on the status of using tools in credit risk management,
the completion of conditions for using credit derivatives in credit risk
management at Vietnamese commercial banks. The results of this study
are the basis for the Ph.D. student to select experts to participate in the
interviews.
3.2.2. Collect and analyze primary data through survey
To assess the current status of using tools in credit risk management,
the completion of conditions for using credit derivatives tools in credit
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