5. Dang Thu Huong

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Dang Thu Huong (MBA)

Implementation Manager, Head of R&D


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AgendaReasons for internal management in Banks

Scope of internal management

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Internal management issues in VN BanksSuggestions for an effective internal management in

VN Banks

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After being member of WTO, enterprise internal

management has been arose as a critical requirement for

VNs economy development

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sustainable growth, particularly in financial institutions

which have high risks and impacts to the economy

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A bank having weak internal management not only makeloss to itself but also result in consequent risks to other

entities and stakeholders

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resulted from the failure of internal management in

general and credit risk management in particularly of the

banking system

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A recent survey conducted by KPMG and the EconomistIntelligence Unit: weaknesses in risk culture and

governance, gaps in risk expertise at the non-executive

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, ,

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 )

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VN Banks

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Internal management affects the Risk Appetite of bankswhich is the measure of the resistance ability to

fluctuation of the economyDefault

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Credit migrationCorrelationVolatilityExposureCash flow

re s

Market Risk

Interest Rate Risk

Liquidity Risk

Financial RiskFinancial RiskFinancial RiskFinancial RiskFinancial RiskFinancial RiskFinancial RiskFinancial Risk

Operation eventProcess/PeopleSystem/ExternalReputation

Strategy

Operational Risk

Business/Management

Risk

NonNonNonNonNonNonNonNon-------- Financial RiskFinancial RiskFinancial RiskFinancial RiskFinancial RiskFinancial RiskFinancial RiskFinancial Risk

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Risk managementCredit Risk, Market Risk, Operational Risk, ALM

Which does the internal management cover?

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Governance and ComplianceAML, Capital adequacy , Reporting regulatory

Performance managementFTP, Profitability, Cost allocation, Budgeting, Accounting

management, Financial management, ERP, Fixed Assets

Human ResourceOperation/Procedures, Code of conduct

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1. Lack of a legal framework for the internal management

Revised Law on Credit Institutions (2004), Revised

Enterprise Law (2005) No article directly regulating

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Banks have to based on some Degrees to establish themanagement mechanism

Decision 37/2006/QD-NHNN on establishment of Internalaudit unit

Degree 59/2009/ND-CP on 16 July 2009 on organization andoperations of Commercial Banks

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2. Inappropriate managerial and organizational structure

Roles and responsibilities of BOD and Seniormanagement are overlapped in some banks

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Bus ness epartments n HO an Branc es aresegregated by business and geographic

Lack of a proper conjunction among activities, weak

decision making process among the units.

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3. Inappropriate attention to risk management and compliance

Internal Audit (IA) function: A Survey of PricewaterhouseCoopersVietNam with 30 banks including foreign and local banks, of which90% established more than 10 years

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ac o a c ear an ong erm s ra egy or n erna au ; o respon en s: e

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 isonly 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 onIT activity

Insufficient resource for internal audit and internal control; no proper supportingtool for Internal auditors (standardized reporting system, IT support) 15


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3. Inappropriate attention to risk management and compliance

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

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VN Banks

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Risk management StrategyIntegrate the risk management and business strategy to arrive at

the right model to support the current and expected challenges

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Risk Organization Governance

Risk management process

RISK MANAGEMENT SYSTEM AND RISK CULTURE

Identification Risk control &Mitigation

Monitoring &Reporting

MeasurementAssessment

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1. Improve internal management capabilities

Better risk management mindset of the BOD and BOMto arrive at a clear plan of action on implementing the

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Establish an integrated framework for managing riskswith effective support of technology, processes and

people in line with the predefined risk management

strategy

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2. Establish an appropriate managerial and organizational

structure

Clear roles of BOD and the Senior Management

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Proper nvo vement o nes o e ense Business lines

Risk management Dept, ALCO

Audit department

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3. A proper legal framework

There should be a set of Law on Internal managementfor Enterprises and Credit Institutions as particularly

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decisions

Enhance roles and responsibilities of the BankingInspection 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 institutions23


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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.

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Cause the exposures to various risks varies from banks, a banksapproach 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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Thanks for your attention!

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Documents

5. Dang Thu Huong