Dissertation abstracts: Liquidity management in monetary policy of the State Bank of Vietnam

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Research will focus on the basic theory in terms of liquidity management of the central bank, the status of liquidity to execute the monetary policy of the central bank by forecasting method from currency balance sheet and propose management solution on liquidity of the central bank monetary policy.

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Nội dung Text: Dissertation abstracts: Liquidity management in monetary policy of the State Bank of Vietnam

1 EXECUTIVE SUMMARY 1. THE NEEDS OF PROJECT Liquidity is available capital to meet the financial obligations of credit institutions (CIs) or banks. Capital is to meet the requirements of central bank reserves and compulsory excess to perform its payment obligations to customers, with the state budget, dealing with partners, pay debt to the central bank. The banks will maintain liquidity in two forms: in the funds deposited at the central bank and credit institutions. The excess liquidity is the highest portion of liquid, banks will determine the proportion of money kept in bank or deposited at the central bank based on payment demand. Thus, the liquidity kept in the central bank include the required reserve deposits and a part of excess reserves to meet the needs of payment. The central bank manages the deposited liquidity by setting the regulation and policy system, building the rules of intervention, dominating the transaction volume of liquidity in currency markets to adjust liquidity status in the interbank market, dominating the behavior of balance adjustment between deposited liquidity and fund in bank to ensure its proper operation, thereby affecting market interest rates in order to achieve the ultimate goal of the monetary policy. To execute the liquidity management, central bank needs to forecast liquidity status in the market, determine the value needed to intervene and propose the solutions to adjust liquidity status in the market to achieve the goal of monetary policy execution. Depending on the nation, with the characteristics of political institutions, the stage of economic development as well as the effectiveness in monetary policy operation of central bank; the impact of each element that causes the supply and demand of liquidity at the central bank as well as the prediction and control of single component in central bank liquidity also differ. The State Bank of Vietnam is gradually improving the management of liquidity such as complete forecasting methods, provide sources of information for the forecast reports, improve uniformity of intervention system,...Despite many efforts, the results gradually are more accurate prediction, the tools are used flexibly, creating volatility in line with market requirements and achieve the State Bank goals, but the result of liquidity management of the central bank faces many constraints, liquidity status of the market reflects positive changes after the central bank intervened, directed interest rate does not drive market interest rates, the operating activities of SBV go after market, the market is not interested in the operating from the central bank. Causes affecting the results on liquidity management of State Bank of Vietnam is the
2 lack of reporting system, forecasting techniques are short-term, predictable and management on liquidity are limited, the coordination of macroeconomic policies is inconsistent ... leading the central bank in the passive state of liquidity adjustment to achieve the objectives of monetary policy. Starting from practical requirements outlined, this project have selected research topic is: "Liquidity management in monetary policy of the State Bank of Vietnam" contributing more fully to the scientific arguments management of liquidity, practical implementation at the State Bank of Vietnam and then to propose solutions to improve the efficiency of the management of liquidity in order to meet the requirements of operating monetary policy effectiveness. 2. LOCAL AND GLOBAL RESEARCH Globally, there have been many studies related to the topic of monetary policy (the tools of monetary policy, the objective of monetary policy...), and money market. However the material directly related to liquidity management of central bank in monetary policy execution in the world are not published much. The author represents the study of this problem: Bindseil Ulrich (2000), Falko Fecht, Kjell G. Nyborg, J'org Rocholl (2007), Simon T Gray (2008), Mohamed Afzal Norat (2008). In addition, organizations such as the International Monetary Fund (IMF), European Central Bank and the U.S.Federal Reserve Board also has a number of research articles related to the topic. In studies in Vietnam, the research topics related to monetary policy, the tools of monetary policy, the transmission channel of monetary policy action has been much research interested, however, directly related to the operation of the executive liquidity management in the monetary policy of the central bank is only "Improving prediction method to enhance Liquidity regulatory capacity of central bank in money market" of Deputy Governor – SBV Nguyen Dong Tien (2006). Totally, in the world and in Vietnam, the researchs on liquidity management of the central bank is limited and has not been verified and systematiced as well as a verification completely and comprehensively, the study made no difference about liquidity concept in terms of commercial banks and the central bank in every aspect, the liquidity status changes affect each market and at different levels. So choose the thesis focuses on systematic reasoning related to the management of the central bank in terms of liquidity, and study the performance of this work at the State Bank of Vietnam to increase operating efficiency of monetary policy. 3. PURPOSE To clarify the theory on liquidity management operations: The concept of
3 liquidity, supply and demand of liquidity, content management of liquidity, forecasting methods of liquidity... Research on experience of management and forecasting liquidity in some countries around the world, to figure out the lessons for Vietnam. - Analysis of the management situation and forecast the liquidity of SBV in operating monetary policy by itself. - Propose solutions to address the issues raised in the liquidity management of the SBV, improve quality and improve the management of liquidity to contribute and enhancing the effectiveness of monetary policy. 4. OBJECTS AND SCOPES Objects: research will focus on the basic theory in terms of liquidity management of the central bank, the status of liquidity to execute the monetary policy of the central bank by forecasting method from currency balance sheet and propose management solution on liquidity of the central bank monetary policy. Scopes: the project researches on the management aspects of the central bank, using data on the Cash flow balance sheet of SBV primarily and analyzing from 2000 to 2012. 5. METHODOLOGY The research applies deductive methods, systems analysis, reflecting analysis, comparison, surveys, statistics, combining theory and practice, Qualitative analysis combines quantitative models used single regression. 6. RESULTS Thesis is the first science research project deeply and completely on the liquidity management (in terms of the central bank) in the monetary policy of the State Bank of Vietnam. Especially used qualitative research methods to clarify the scientific arguments. 7. RESEARCH STRUCTURE Besides Executive summary, Conclusion, the research has 3 chapters: - Chapter 1: General theory of Liquidity management in the monetary policy operation of the central bank - Chapter 2: Status of Liquidity management in the monetary policy operation of the State Bank of Vietnam - Chapter 3: Solution to improve the Liquidity management in the monetary policy of the State Bank of Vietnam
4 CHAPTER 1 GENERAL THEORY OF LIQUIDITY MANAGEMENT IN THE MONETARY POLICY OPERATION OF THE CENTRAL BANK 1.1. OVERVIEW ON LIQUIDITY AND ITS MANAGEMENT IN MONETARY POLICY OPERATION OF THE CENTRAL BANK 1.1.1. Liquidity 1.1.1.1. Concept "Liquidity" means funds available to meet its financial obligations, such as customer cash, payment requirements, to meet loan commitments to customers, payment for budget and credit repayment for central bank of the bank. Under banking system perspective: Liquidity is capital strength of a financial institution, is located in the banks' available capital. On the management of the central bank: capital availability deposits at central bank - is the amount of reserves that banks send to the country's central bank. It includes: compulsory reserve deposits, demand deposits, etc. .. 1.1.1.2. Demand and supply on liquidity at the central bank Demand on liquidity at the central bank The demand on liquidity is understood as a set of demands to be met to make the financial obligations of the banks with our partners, including central bank, the state budget, other financial institutions and especially customers of the banks. The demand on liquidityis formed by two parts: the free availability of capital and policy requirements. The free availability of capital: As the demand to meet the payment comes from the intrinsic factor in the activity of credit institutions and outside the direct control of the central bank. The liquiditypolicy: the implementation of the central bank requires that banks have to deposit an amount known as the reserve requirement. The relationship between the free liquidityand the liquiditypolicy: a close relationship with each other through the closing balance date of the payment deposit accounts. In which the demand on capital availability depends on the required reserve policies, the institutional factors and not change daily. The rest on the central bank deposit accounts in order to meet the demand of liquidityitself. Supply on Liquidity at the central bank Supplying liquidity is the amount of money that the banks used to meet its
5 financial obligations to stakeholders such as customers, budgets, with other banks or the central bank. Basically, the supply of liquidity of the banks is formed from two main sources: (i) raising capital from the economy, (ii) additional supply from the central bank through the channels: buying foreign currencies, the budget loans, loans for financial institutions and a number of other terms. When considering the central bank provides capital availability, the research focused on providing the liquiditycomes from the change of the elements on the cash flow balance sheet of the central bank. - The autonomous supply factors including net foreign assets, government net lending, Other net assets. - The supply on policy factors include Refinancing for banking activities in the market. 1.1.2. Managing Liquidity of the central bank in monetary policy operation 1.1.2.1. Concept Liquidity management is the task of central bank forecasting liquidity generally for the whole system, establishing rules of conduct and the use of interventions to adjust monetary conditions and the state of supply and demand of liquidity used in the interbank market to achieve the ultimate objective of monetary policy. 1.1.2.2. The needs on liquidity management in monetary policy operation of the central bank The central bank controls liquidity to improve the effectiveness in monetary policy operation The central bank approves the forecast on capital availability state of the market, determine the exact dosage and duration of the intervention will be the incentive to market dynamics change in a positive direction, thereby achieving goals central bank sets. We can say, central bank well manage the liquidity will improve the impact of the policy tools to the real variables of the economy were chosen as policy goals in each period, the national monetary policy. Support the central bank to adjust the state of liquidity of the banking system The forecasting liquidity of credit institution system will help the central bank understands normal and abnormal of the market, then propose solutions on the state capital availability on time through pumping money, adjusting the price mechanism. It is important to keep the central bank to adjust the state of liquidity, because the central bank understands that when the state of supply and demand imbalance in liquidity - whether surplus or deficit - will push the central bank to implement the
6 undesired behavior, so the central bank will be able to satisfy the requirements of the market to implement the planned monetary policy. 1.2. CONTENT AND PROCESS OF LIQUIDITY MANAGEMENT IN MONETARY MANAGEMENT OPERATIONS OF THE CENTRAL BANK 1.2.1. Process of liquidity management in monetary policy management operation of the central bank 1.2.1.1. Forecasting the liquidity in monetary policy execution The role of liquidity forecasting in monetary policy operation Forecasting liquidity as a basis for central bank can set the operating solution monetary policy appropriately, contributing to capital availability, regulatory market interest rates on monetary policy objectives in each time period. Forecasting liquidity method  Base on Cash flow balance sheet of the central bank  Forecasting approach: approaching cash flow balance sheet of the central bank allows the use of the data items on the balance sheet to predict the state of available capital. The change of each factor on the balance sheet will affect the Liquidity of the whole banking system. Supply of liquidity= (net foreign assets + Government net lending + other net assets - cash) + bank’s loan from the central bank Demand of liquidity= required reserves + reserve for payment  Liquidity (bank’s reserves at the central bank) =  net foreign assets +  Government net lending +  bank’s loan from the central bank + other net assets -  cash [37]  Procedure on liquidity forecasting in monetary policy operation Step 1: Identify factors to predict Step 2: Create the set of data history on supply factors – demand on Liquidity in period of time Step 3: Analyzing the factors impact on forecasting: this step is the most important and sofisticate in forecasting procedures.  Forecasting factors on liquidity  Autonomous liquidity supply Government net lending: To predict the trends of the movement items for Government net lending, forecasting departments need to monitor the movement of lending and cash of the Government, in particular through revenues and operating expenses of the government guarantee. The effect of this factor prediction depends
7 on: the relationship between the MOF and the central bank decided to smooth the information exchange; Opening of Government Accounts at commercial banks, central bank or open in 2 places will affect the capital movement and affect forecasted results. Net foreign assets: In the short term, the change in net foreign assets by the central bank intervened in the foreign exchange market, the long term: The change in net foreign assets have been affected by the changes in the components of the balance of international payments. Cash in circulation: In the short term, cash requirements primarily influenced by seasonal factors such as salary payment date, day off, day to spend money to increase salaries, the forecast on money factor need to rely on historical data to analyze to find out the seasonal factors, in long-term, factors affecting cash requirements are: (1) growth trend and cyclical demand cash, (2) growth rate of nominal GDP (3) the changing trend in the relationship between the Government and cash needs, ... Net other items: In the short term, the net accounts negligible fluctuations. In general, if there is no specific information in advance, able to forecast unchanged except receivables and payable.  Supply on capital availability policy: Depends on the monetary policy objectives of each plan period and providing credit through the banking system, then forecasting is high certainty and accuracy  Forecasting the demand factors of available capital: To predict the availability of capital of the whole banking system, central bank interesting in total liquidityrequirements of the whole system without the capital requirements seperately, except in some countries there is a separation of the currency market.  Forecasting the demand on required reserve: This amount is affected by the required reserve management methods and factors affecting the average amount of money raised by the banks. How to forecast of total deposits or on the composition of deposits may use structure models or time model, taking into account the seasonal nature of the deposits factor  Forecasting the exceeded reserves: this needs almost no sensitivity to interbank rates changes. There are three factors that affect the demand for this balance: efficient payment process, the expectations of central bank behavior in the provision for credit loss reserves at no penalty rates; interbank market status Step 4: Analysis pre-prediction failure Step 5: Forecasting implementation: Solution 1: analysis base on historical
8 data and seasonal adjustment; Solution 2: Based on the data analysis by planned or expenditures due under the contract, such as loans, bank’s debt collection for central bank, due date of the sale and purchase contracts with terms limited to the central bank.... In particular, Solution 1 is active forecasts of the central bank, solution 2 is higher accuracy, but the central bank depends upon the data collection. Also, able to combine quantitative methods to measure the impact of individual components to the state of supply and demand of the central bank Liquidity in each period, then having more solid deligence for the decision to use central bank intervention to achieve monetary policy operation. The model indicated mostly single regression model, reflecting the impact of a factor on the supply / demand Liquidity Step 6: Summary of forecasting results  Pros and cons of forecasting method  Pros: Increasing the autonomy of the central bank forecasts; negligible bias in the short-term.  Cons: Depending on the coordination of information between the central bank and the MOF, forecasting results for the Liquidity of the whole system under this approach depends on a number of fundamental conditions: (i) any payment of CIs are made through the payment system of the central bank, (ii) money market has no separation.  Forecast approaching from CIs  Forecast literature This prediction method is based on figures reported by Cis and the central bank, aggregation on liquiditystatus of the market at the time of management.  Forecasting method For good data forecasting from banks, central bank needs to standardize forecasting methods liquidityin the system, each bank have been tracking systems to execute cash flow analysis of their units on the basis of management and monitoring of all on-line entries arising property and asset and Liability in each bank.  Pros and cons of forecasting method base on balance sheet approaching of bank Pros: Helps central bank to forecast more accurate and complete the liquidityof the whole system; central bank easily requires banks to report the status of liquidityfrom time to time for the central bank. Cons: The role of the central bank initiative in forecasts is limited; require each bank to invest in infrastructure for information and billing systems ... and human resources to implement the centralising management capital and on-line in their system entirely.
9 1.2.1.2. Determination of intervention: (i) target of monetary policy each period, (ii) Based on forecast results of available capital, (iii) The situation of the previous session, (iv) Review review of market parameters such as interest rates, changes in capital requirements ... Then the monetary policy committee (in some countries by the Commission open market operations) will determine intervention 1.2.1.3. The intervention solutions to achieve goals Open market operations: The operations and primarily used frequently in the short-term intervention and immediate availability of capital management Tools are often used to supplement the impact to the state's last liquiditymarket after the open-market operations ending the day session or extended impact to the state capital of some banks that can not join OMO operations. Obligatory reserves: The intervention measures provide long-term adjustment strongly to the status of capital availability in the market through the central bank requires banks to hold a prescribed amount of money based on the required reserve ratio and the amount send to mobilize each period. 1.2.2. Timeframe of forecasts and Liquidity management Short term forecast: short-term forecast period depends on the length of the period and the ability to maintain an accurate forecast of the central bank. Forecast period is usually today (t = 0), the next day (t = 1), from today to the end of maintenance period. Long-term forecast: central bank can help more easily in the operating plan. The long-term forecasts on a quarterly basis, the next year to help the central bank determines an interest goals or payment term of OMO operation. 1.2.3. Factor impacts on liquidity management in monetary policy operation of the Central bank 1.2.3.1. Objective factor The relationship between the Central Bank and the Government: Basically, this relationship affects the ability of the central bank planning to government net lending in liquidityforecasting method that based on cash flow balance sheet of central bank. The planning is whether or not driven by an independent central bank with the Government, under the Government. The effect of the capital flows transfering between lenders and borrowers in the interbank market: will affect the maintenance of the status and estimated availability of capital, the interbank market is complicated by the uncertain behavior of the participating banks in trading capital.
10 The regulatory in capital management of banks: the banks' capital management major influence on the ability to exploit capital at a time, to the capital state or the supply of capital to the interbank market demand, thereby affecting on the Liquidity management role of the central banks. The banks have two forms of capital management centralised and decentralized. 1.2.3.2. Subjective factor Target system of Monetary policy: The system selected target oriented operating interest or base on volume will affect the quality of the liquidity management of bank. Methods of forecasting on liquidity of the central bank: Two methods are used in the world: (i) the forecast on the cash flow balance sheet of the central bank that brings proactive in forecasting, (ii) forecast from the banks report provides more accuracy. The rules and sanctions in monetary market: Markets organized and comprehensive legal framework to facilitate the central bank control over information and market signals. 1.3. EXPERIENCE ON LIQUIDITY MANAGEMENT OF MONETARY POLICY OPERATION FROM OTHER COUNTRIES 1.3.1. FED 1.3.1.1. Forecasting method of FED Forecasting methods used are accessible from the balance sheet of the central bank, the duration of the forecast in the U.S. is conducted every two weeks and daily. This two-week orientation constantly updated daily as estimates of reserves needs to be adjusted. Daily Forecasting Division on liquidityis the level 1 agent provides information about the market situation. Every month, the dealer 1 exchanges and assesses the market status with the economic experts, their customers and provide the forecast devision on liquidity Forecasting on Liquidity demand + The reserve requirement forecast: Fed manages the reserve requirement by duplicated partly method. Therefore, the amount of required reserve maintained relatively stable from the first day to the last day of the period. The banks report the amount of deposits to the reserve requirement. Forecast Devision would result in relatively stable data and accurately. + Setlement deposits: Before the required reserve maintenance period, besides the deposit of required reserve, banks are expected to inform the reserves to ensure solvency for the central bank. Forecasting the supply on Liquidity
11 + Net foreign assets: Fed takes foreign currency from the Treasury to exchange for dollars provided to Treasury. Fed spots money buying and protect the value of the currency that is bought and sold the same amount of money at the same price and term for the Treasury. + Treasury deposit items: Due to the close relationship with the Treasury and information systems, Treasury data updated daily, then Fed should be able to exchange information with the Treasury and the forecast impact of fiscal, government deposits and reserves of banks is very convenient. + Cash out flow: Using foreign currency is also a complicating factor for the forecast by the U.S. dollar is the preferred currency used in international transactions and in some countries with the status of the dollar can be used to replace the domestic currency. 1.3.1.2. Intervention: Fed can change the market situation through the use of three tools: reserve requirement, discount rate projection and open market operations. Open Market Operations: Fed used OMOs to adjust the supply on liquidityto keep interest rates on interbank market around overnight interest rate target Lending: The primary purpose of windows is to limit the pressure on the overnight rate by providing credit adapted to meet the lack of reserves to avoid overdrafts or late in the day, but the banks are reluctant to rely the discount window. This complicates the Liquidity management of FED and reduce the effectiveness the safety valve of discount window. Required reserve: The difference in tool using is the Fed does not change the required reserve ratio which changes the required reserve deposit limits corresponding to the fixed rate is 0%, 3% and 10%. This is a tool to create long-term impact of liquidity management and Fed does not use much. Fed funds rate: It is the Fed's interbank rates target. Fed does not decide on interest rate but providing direction to interest rates and then use the open market to impact the overnight interest rate target. 1.3.2. Experience of liquidity management at ECB 1.3.2.1. Forecasting methods: ECB forecasts made by the method of the balance sheet of the central bank with aggregate report, analyze the report forecasts liquidityof the member nations. - Forecast on demand of liquidity: self-Factor is the most unpredictable factor in the availability of capital in the European region. - For the demand on reserve requirement forecasting: ECB managing the reserve requirement by an average in period, by partly duplicated solution,
12 particularly due to the high required reserve requirements in the European system, banks tend to maintain cash reserve requirement relatively stable. - Excess reserves: ECB control state of liquiditythrough the difference between the rate of reserve and deposits at the central bank with no more than 0:25% -0.5%. - Forecast in supply of liquidity: The European system, assessment the needs on liquidity is the major determinant of liquidity allocation in open market operations. The determination of liquidity needs ends 1 day before deciding on the next refinancing operations, ECB may decide to change the supply of available capital. ECB has a database to run econometric model forecasts as a basis for a number of factors. 1.3.2.2. Intervention solution: ECB uses monetary policy tools to intervene in order to change the state of available capital, state of capital availability in the market is reflected in the EONIA. The ECB's monetary policy tools are included: open market operations, channels and minimum reserve. Open market operations of four categories: primary refinancing operations, refinancing maturities 3 months, professional intervention to regulate markets and instantaneous adjustment of structure. Important tool in creating signal for the monetary policy of the Eurosystem's main refinancing operations, done weekly for a period of two weeks. Vehicles frequently: Eurosystem offers two facilities deposits and credits frequently, one for supply and one to absorb the available capital. 1.3.3. Experience on liquidity management in monetary policy operation in Malaixia (BNM) 1.3.3.1. Forecasting method Currently, the Malaysian currency market exists two inter-bank market, which operates the interbank market accounts for the majority of Muslims in the active trading of money market interbank Malaysia. Both markets operate under the unified management of the central bank of Malaysia. The method is used mainly from the reports of banks. To have the base of currency operations, including open market operations impact on bank’s reserves, in order to achieve the goal-oriented interest rate (policy rate), BNM established Forecast Division on Liquidity of the Investment Department and the financial markets. The predicted Liquidity daily substantially BNM mainly synthetic calculations, forecasting Liquidity of banks. The data on the Liquidity position of the bank is provided by the bank for BNM via on-line systems (BIDS) 1.3.3.2. Intervention solution The capital management process includes three stages:
13 Step 1: Assess the liquiditystate of banks in normal operating conditions in the next few months. Step 2: Evaluate whether a bank able to tolerate in case of the liquidity shock. Step 3: Evaluate the structure of the system (through the financial indicators... to consider the impact to the organization when market volatility). Through the above criteria, along with the expected volatility of the world situation, BNM will need to forecast the necessary capital and market intervention in order to perform its intended target. In recent time, BNM is used primarily official interest rate instruments (Overnight Policy Rate - OPR). It is used as the basis for the overnight interest rate on the interbank market (KLIBOR) and fluctuating levels of ± 50 points allowed around the OPR. BNM announced OPR at a rate consistent with long-term goals of inflation and economic growth in the context of full employment (currently announced OPR is 3% lower than the inflation rate in 2012 was 1.3 %) 1.3.4. Lessons for Vietnam (i) necessary to carry out a combination of the two forecasting methods, (ii) Data relating to the forecast is managed systematically and scientifically in a long time, (iii) the mechanisms should be divided and official information sharing between the central bank and Ministry of Finance in time, (iv) implement management methods compulsory coincide partially or completely identical; (v) Uniform methods of capital management at banks, especially commercial banks, (vi) Liquidity management Devision should be connected directly to the providers of information, (vii) improving capacity management, information exploration and forecasts of Liquidity management officer. SUMMARY OF CHAPTER 1 This Chapter presents an overview on the concept of capital availability, liquiditymanagement executive in montetary policy operation of the central bank, the elements constituting supply, demand, capital availability, causes influencing factors , central bank selection method to forecast the liquiditymovements based on institutional characteristics and sources of information in the national reports, intervention options to adjust the capital status of market . Besides, from experience managing liquidityin monetary policy operating in several countries in order to draw 7 lessons for Vietnam.
14 CHAPTER 2 THE STATE OF LIQUIDITY MANAGEMENT IN SBV’S MONEYTARY POLICY PERFORMANCE 2.1. THE STATE OF SBV’S MONEYTARY POLICY PERFORMANCE 2.1.1. The targets 2.1.1.1. Policy targets: According to 2010 laws, SBV has a major trendy in stability VND values through inflation target. 2.1.1.2. Intermediate target that chosen by SBV is the increased level of general M2 payment instrument. 2.1.2. Tools system of monetary policy in practice 2.1.2.1. Direct tools system - Interest tools: That used by SBV to have an effect on the premises of Financial institution’s business interest: from August,2000 to May,2002, SBV administrated basic interested plus margin. From June, 2002 to May, 2008: Mutual agree interest Mechanism From May, 2008 up to now, after Degrees No 16/2008/QD-NHNN approved by the SBV’s governor issued on May, 16th,2008 about basic interest administrate mechanism by VND. From early on 2011 up to now, the SBV’s government approved an administrative rule that forces commercial banks cannot pass over the regulations on deposit interest ceiling. 2.1.2.2. Indirect tools system - Compulsory Reserve: Since the approval of SBV laws and especially regulations, rules on compulsory reserve administration, the sanctions applied when excess or inadequate has impacted on this followed consciousness of this tool. Most of commercial Banks have maintained sufficient and excessive quite well their compulsory Reserve. That followings have create an advantage for Liquidity forcast department in giving out good forecasts and improved the Liquidity administration. - Regranted capital policy: Documents system has complied with international customs gradually but when combining with monthly inflated index the SBV has showed its passive management of liquidity in order to define targets and use tools for suitable monetary policy administration. These resulted in phenomena of interest couple (TCV,TCK) that has not yet oriented the markets, and often up and down after the changing of inflated index. - Open market operations: The number of members takes part in open market
15 raised up gradually in years with slowly speed,only 1 or 2 members per year, strongly increased in 2012. Times of transaction has shown out the advantage affects of this tools on liquidity state to market. 2.2. THE STATE OF LIQUIDITY MANAGEMENT OF SBV’S MONETARY POLICY PERFOMANCE 2.2.1. Laws systems 2.2.1.1. About Liquidity management regulation - Degree no.37/2000/QD-NHNN1 on available management regulation. - Degree no.38/2000/QD-NHNN1 on forcast time and information providing periodically for Liquidity management. 2.2.1.2. About interfere methods: OMO Compulsory Reserve, regranted funds policy 2.2.2. Rules on forcast time, information resources, information providing periodically Forecast time: 3 times a month. First time from 01 to 10. Second time from 11 to 20. The last from 21 to end of month. Information resources and information providing periodically on the forecast needed issues. - Net foreign Assets: SBV transaction centre gives out informations of the before working days on the end of business day. Foreign exchange management Department provide information withing 5 first days of month. - Claims on Government net:sharing information Mechanism between SBV and Ministry of Finace. - Claims on DMBs: Information get from Transact center and credit department through telephone net work, fascinate and post office. - Net other items Assets: Finance and Accounting Department send by telephone, fascinate network and post office ten days a time. - Currency circulation: Pushing Treasury Department collect reports 5 days a time periodicly Finance and Accounting depart provide the before information time and give out forecasts in the next two days often forecast ending. 2.2.3 The state 2.2.3.1. SBV’s liquidity forecast situation in the previous - Foundation for liquidity forcast: Based on deposit balances changing of financial institution at SBV. Teckniques and methods - Forecast Method: SBV has given out forecasts from Monetary Balance Sheet
16 and based on historic data line and mainly adjusted seasonal. This method is applied spreadly in some country like Fed, ECB, PBOC… under IMF guidelines. - Forecast tecknique: the changing of factors in SBV’s Monetary Balance Sheet, which is a base to analyse, find out laws, and forecast the variability of supply-demand liquidity. (i) Supply: The variability state of supply liquidity is divided in different phase, which showed the macro changing state has become special strongly from 2008 to 2011. This not only make the factors of self oriented supply and policy supply on the SBV’s payment balance sheet changed without order, but also resulted difficulties in liquidity forecast. This thesis avaluate the affective level of some factors on liquidity supply, that the net foreign exchange credit asset has strongly influence on liquidity supply. (ii) Demands: SBV still maintains compulsory reserve deposits and payment on the same account, this express the closed tie relation between the twos tho meet the capacity of liquidity demand. Through the measured economy, the compulsory reserve deposits has clearly affect on demand. The balances often compulsory reserve eliminatering is extremely small in the cause of 2008-2012 this expressed that the tense level liquidity on banking system and the SBV’s tightly liquidity management. 2.2.3.2. Interfere Methods and state of bank money market Interfere Methods: SBV only use OMOs to manage the liquidity in short terms. The data about transact times, the number bid sucsses and transaction methods of OMO in the course 2000-2012 expressed their adjustment to Liquidity and other monetary accommodation raised the standard of OMOs show it’s role in Liquidity state on markets, in the circumstance that the dependant of banking system on SBV in very high.  Interfere Results: Interbank is the first place of SBV’s Liquidity adjustment. Although the SBV choose the central money volume is prospective activity, transaction volume and interests level on interbank reflect relations between Liquidity supply and demand of market, where receive and transmit monetary policy affects, show directly SBV’s liquidity management results. Interbank transaction volumes grow fast in years and have trendy increased in quarters, lowest in quarter no. 1, upgrade gradually in quarter no. 2, 3, 4 that clearly reflect financial institution’s lquidity exploring and management when their participating in interbank is improved. Market arise rules on changing the state of liquidity. Therefore, these are very important information for SBV’s forecast, liquidity management. 2.2.4. Quantity evaluation on influence of factors made on Liquidity supply- demand to state on SBV’s monetary balance sheets
17 Based on theory models built on chapter 1 and the IFS’s data, which is summary in 2.2.3.1 articles, this part will focus on estimated results in models expressed on 1.2.1 1st model: Impacts of Net Foreign Asset on liquidity supply. This model explain up to 88,9252% for the changing of liquidity supply (R2=0.889252).[Appendix 1] 2nd model: Impacts of Net Claims on Government on Liquidity supply. The second sheet show 56,1404% for the changing of Liquidity supply (R2=0.561404). [Appendix 2] 3rd model: Impacts of Net Other Items on Liquidity supply. This model has a quite small co-efficient define, even 0,225072 and the verify result proved that it suitalble but the explaining rate is small [Appendix 3] 4th model: Impacts of Banking System Lending on Liquidity supply. The sheet no.4 show that banking system lending item explain for 61,7354% of changing liquidity. In detail, when banking lending go up or down 1% liquidity equivalent is 0,274952% in average [Appendix 4] 5th model: Impacts of Compulsory Reserve on liquidity demand: This model explain for 69,95 % of changing Liquidity demand and when compulsory reserve go up or down 1% Liquidity demand equivalent is 0,549116 %, this actually depends on compulsory reserve [Appendix 5] 6th model: Impacts of General banking mobilization capital on Settlement deposits at SBV, that go up or down 1% the liquidity deposit equivalent is 0,896425%; relation between the two variable number is in the same direction [Appendix 6] 7th model: Impacts of Settlement deposits at SBV on General Domestic Products. This model explain for 81,4606% of changing General Domestic Products. So, when Settlement deposits at SBV go up or down 1% General Domestic Products equivalent is 0,625168%.[Appendix 7] 8th model: Impacts of Settlement deposits at SBV on M2: This model explain for 81,4606% of changing General Domestic Products. So, when Liquidity Deposit go up or down 1% M2 supply equivalent is 0,625168%.[Appendix 8] 2.3. EVALUATE LIQUIDITY MANAGEMENT OF SBX’S MONETARY POLICY PERFORMANCE. 2.3.1. Results - Liquidity regulation documents meet requirement of practice activities - Liquidity forecast methods are under international standards - Informatics system is variable and update - Informatic sharing mechanism in under decree
18 - OMOs expressed effectively Liquidity management step by step. - OMOs’s interest change closely with interbank’s 2.3.2. Some disadvantages - Forecast results is not stable yet caused strongly changing forecast factors - Activities on management and market interfere have not created oriented impacts. - Informatics sharing mechanism does not adequate, data system is at a start reported, information system does not embrace. - Time for liquidity forecast is short term - SBV’s liquidity manage effects have not influence on whole market. - Interbank transactions have not reflected correctly common liquidity state of banking system. 2.3.3. Reasons 2.3.3.1. Objective reasons: - Macro- economic environments is not stable - Vietnamese interbank divided, that has not attracted many partners - Interbank modern transactions methods have not applied widely - Legal document regulated interbank activities is not specific - Inadequate of clearing and publishing information - Financial market does not developed 2.3.3.2. Subjective Reasons - Legal document related to Liquidity is not sufficient. - SBV’s does not define his Liquidity management purposes and interfere methods outside OMOs. - SBV’s payment activities is disadvantage. - Communication system and infrastructure for capital management are not modern. - Regulation application for not abiding information supplying rules to SBV of Commercial Bank not appreciated. SUMMARY OF CHARTER 2 This charter focus on analysis, reflection, and evaluation Liquidity manager of SBV on the course of 2000-2012. With the handover encouragement from SBV to a modern central bank, the Liquidity management also changes. Liquidity management standardizes step by step, this go with forecast contributing to enhance affections of SBV monetary policy.
19 CHAPTER 3 SOLUTION TO IMPROVE LIQUIDITY MANAGEMENT IN MONETARY POLICY OPERATION OF STATE BANK OF VIETNAM 3.1. DIRECTION ON OPERATION AND EXECUTION IN MONETARY POLICY OF THE STATE BANK OF VIETNAM IN THE FUTURE 3.1.1. Direction on operation of the State bank of Vietnam Towards a model of modern central bank, reached the advanced level in Asia after 2010; develop and implement effectively monetary policy to stabilize the value of money, inflation control, contributing to macro-economic stability, economic growth, the successful implementation of the industrialization and modernization of the country. 3.1.2. Direction on execution in monetary policy and liquidity management in monetary policy operation of the State bank of Vietnam SBV defined direction, target in monetary policy operation for the period 2010- 2015: (i) Continued on executing tightly the monetary policy and flexibility to prioritize the inflation control, macro-economic stability, support economic growth as appropriate, money market, foreign exchange stability consistent with macroeconomic developments; banking system safety, comply with regulations and legislation on currency and bank operation, (ii) the total payment increases properly that has passed the Congress, and interest rates and exchange rates are at a reasonable execution in order to balance with the macro-economic, changes in the money market, foreign exchange. SBV refers to the liquiditymanagement and liquiditymanagement methods through monetary policy instruments as follows: Operating flexibility and synchronization tool of monetary policy, to ensure control of money supply for match the objectives of liquidity and credit growth targets that approved; Due to information, data to serve the forecasts activities and the monetary policy operation: (1) Organize the collect information systems, ensure efficient data collection, data aggregation more accurate and timely. Coordinate with the Ministries to improve the quality of formulation, analysis, forecast balance of international payments for monetary policy operation, exchange rates, (2) monitoring of the macroeconomic developments, domestic and global financial markets to promptly update the forecasts of macroeconomic, changes in the monetary targets for the timely proposed solutions monetary policy operation and banking activities; (3) to direct and guide financial institutions to comply with the accounting regime, statistical reports...
20 3.2. SOLUTION TO IMPROVE LIQUIDITY MANAGEMENT IN MONETARY POLICY OPERATION OF THE STATE BANK OF VIETNAM 3.2.1. Legal solution 3.2.1.1. Promulgate additional legal documents relating to the Liquidity management of the central bank: Currently, the documents system directly related to the liquiditymanagement is still be the Decision 37/2000/QD-NHNN and 38/2000/QD-NHNN but stop at the simple description the concept of liquidity and liquidity management; steps management and forecasting liquidity; sources of information that have not mentioned specifically about the purpose and objectives of liquidity management of the central bank. - The direction on changes and supplement the liquidity management regulations: Reviewing the concept of available capital; Adding the purposes of liquiditymanagement of the State Bank of Vietnam; Adding liquiditymanagement objectives; Adding forms to collect information, sources of information for forecasting liquidityoperation; Expand the use of forecast results on available capital. - The Decision on Amending the reporting period: need to add requirements for the projected long-term period of 1 month, 6 months to 1 year. Periodically for providing information: SBV should build a software program to faster reporting, integrated for the relevant units. 3.2.1.2. Identify regulatory framework liquidityand appropriate interventions to the market - Identify interbank interest rate is the target in Liquidity management operation of SBV: The fact that the relationship more intimate of the liquiditystatus of banks with interest rates on the interbank market. - Selecting regulatory approach appropriately with the market: central bank should define more specifically the use of tools in each phase. With the goal of creating quick and short-term impact will be using OMO tool, with long-term impact and sustainability, will use a combination of OMO and reserve requirement with refinancing policy. 3.2.2. Solutions related to the forecast of liquidityin monetary policy operating 3.2.2.1. Enhanced information sharing mechanism with MoF and other ministries The shareing information between the ministries and the central bank is mutually beneficial, SBV has standard data system to provide information for forecasting and stakeholder data liquidityforecast more accuracy than as a precondition for the other macro intervention.