determinants affecting the liquidity of commercial banks, 2021

LÊ NGUYỄN QUỐC TOÀN

MAJOR: BANKING AND FINANCE

DETERMINANTS AFFECTING THE LIQUIDITY OF

COMMERCIAL BANKS

GRADUATION RESEARCH PAPER

MAJOR: BANKING AND FINANCE

MAJOR CODE: 7340201

HO CHI MINH, SEPTEMBER 2021

THE STATE BANK OF VIETNAM

BANKING UNIVERSITY

MINISTRY OF EDUCATION

AND TRAINING

HO CHI MINH CITY

LÊ NGUYỄN QUỐC TOÀN

MAJOR: BANKING AND FINANCE

DETERMINANTS AFFECTING THE LIQUIDITY OF

COMMERCIAL BANKS

GRADUATION RESEARCH PAPER

MAJOR: BANKING AND FINANCE

MAJOR CODE: 7340201

SCIENCE INSTRUCTOR:

Dr NGUYEN MINH NHAT

HO CHI MINH, SEPTEMBER 2021

THE STATE BANK OF VIETNAM

BANKING UNIVERSITY

MINISTRY OF EDUCATION

AND TRAINING

HO CHI MINH CITY

ii

ABSTRACT

The main purpose of this study is to explore the determinants affecting the

liquidity of commercial banks in Vietnam. Including internal bank factors and

external macro factors. Liquidity (LIQ) is measured using total liquid assets

divided by total deposit balances. The study used secondary databases collected

from 27 commercial banks over a ten-year period from 2011 to 2020. Using

regression method OLS-FEM-REM to obtain results. The study shows that the

equity use efficiency (ROE) is positively correlated with liquidity, has a

significant impact on the variable LIQ. The liquidity of commercial banks is

completely unaffected by equity ratio (CAP), non-performing loan (NPL), bank

size (BS) and economic growth (GDP). Meanwhile, profitability (EA) and loan

on deposit ratio (LDR) have a negative impact on the variable LIQ. With macro

variables, inflation (INF) has a positive impact on the bank's liquidity; Economic

growth has no impact on the liquidity of commercial banks.

Keywords: commercial bank, liquidity, loan on deposit ratio, non–performing

loan, bank size, equity ratio, equity use efficiency, profitability, economic growth,

inflation

iii

PLEDGE

My name is Le Nguyen Quoc Toan. I am a student of Banking university of Ho

Chi Minh city, majoring in Banking and Finance.

The research paper: “Determinants affecting the liquidity of commercial

banks” has been carried out at Banking university of Ho Chi Minh City.

This research is the author's own research work, the research results are honest,

in which there are no previously published contents or contents made by others

except sufficient citations or source citations in research paper. The information

and data used in the research processes are collected by author from various

sources, which is completely truthful and clearly citied in the references.

Ho Chi Minh, 25th Sep 2021

Lê Nguyễn Quốc Toàn

iv

CONTENTS

CHAPTER 1. INTRODUCTION......................................................................... 1

1.1. Background of study...................................................................................... 1

1.2. Objectives...................................................................................................... 3

1.3. Research questions ........................................................................................ 4

1.4. Significant of the study.................................................................................. 4

1.5. Objects and Scope of study ........................................................................... 6

1.6. Structure of paper ......................................................................................... 7

Chapter summary.................................................................................................. 7

CHAPTER 2. THEORETICAL FRAMEWORK AND LITTERATURE

REVIEW............................................................................................................... 8

2.1. Theoretical framework .................................................................................. 8

2.1.1 The concept of liquidity .......................................................................... 8

2.1.2. Liquidity positions ............................................................................... 10

2.1.3. Liquidity risk........................................................................................ 11

2.1.4. Liquidity risk management in Vietnam’s banks .................................. 13

2.2. Measurement of liquidity ............................................................................ 14

2.3. Specific factors affecting commercial banks’ liquidity............................... 19

2.3.1 External factors..................................................................................... 19

2.3.2 Internal factors ...................................................................................... 20

2.4. Literature review ......................................................................................... 25

v

Chapter summary................................................................................................ 31

CHAPTER 3. DATA AND METHODOLOGIES............................................. 32

3.1. Data collection methods and techniques ..................................................... 32

3.2. Research Models ......................................................................................... 33

3.3. Data analysis methods and techniques: ....................................................... 39

Chapter summary................................................................................................ 44

CHAPTER 4. EMPIRICAL RESULTS AND DISCUSSIONS......................... 45

4.1. Descriptive statistics and correlation coefficient matrix ............................. 45

4.2. Regression results........................................................................................ 49

Chapter summary................................................................................................ 60

CHAPTER 5. CONCLUSION AND MANAGEMENT INTERPRETATION. 61

5.1. Conclusion................................................................................................... 61

5.2. Recommendations ....................................................................................... 63

5.3. Limitations................................................................................................... 66

Chapter summary................................................................................................ 66

REFERENCE..................................................................................................... 67

APPENDIX ........................................................................................................ 72

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LIST OF ABBREVIATIONS

Abbreviation Explanation

SBV State Bank of Vietnam

NPL Non-performing loan

ATM Automatic Teller Machine

SOCB State-Owned Commercial Bank

PJSCB Private Joint-Stock Commercial Bank

CB Commercial Bank

Obs: Observations

Std. Dev. Standard deviation

OLS Ordinary Least Squared

REM Random Effects Model

FEM Fixed Effects Model

ROE Returns On Equity

vii

LIST OF FIGURE AND TABLES

Figure 1: Specific factors affecting commercial banks’ liquidity ...................... 24

Table 1. Summary of variables in the research model ....................................... 38

Table 2. The results of the descriptive statistics of the variables in the research

model .................................................................................................................. 45

Table 3. Matrix of correlation coefficients between research variables............. 47

Table 4: Test of variance exaggeration factor VIF............................................. 48

Table 5: Regression results of research model LIQ ........................................... 49

Table 6: Check the autocorrelation test for OLS model..................................... 53

Table 7. Breusch and Pagan Largrangian test to check the heteroskedasticity and

choose OLS or REM .......................................................................................... 53

Table 8. Hausman test to select REM or FEM................................................... 54

Table 9. Regression results by using REM method .......................................... 55

Table 10: Summary of research results .............................................................. 57

Table 11. Liquidity reserves of commercial banks ............................................ 61

1

CHAPTER 1. INTRODUCTION

1.1. Background of study

In banking operations, while influencing factors such as credit risk, exchange

rate, interest rate, often have a certain lag, bank liquidity is instantaneous, very

rarely at a time. In banks, the total demand for liquidity is equal to the total supply

of liquidity. Therefore, regularly dealing with a liquidity deficit or surplus is

always a constant factor at commercial banks. If the lack of capital is available

for a long time, slow remediation may damage the bank's reputation in the market,

reducing its ability to raise capital and profitability. And more serious when the

bank has to face the situation where depositors conduct massive withdrawals in

the system without the amount of available capital being guaranteed; this can push

commercial banks to the brink of bankruptcy, be sold or merged and can

eventually lead to the collapse of a country's banking and financial system.

Liquidity is a vital factor determining the safety of any credit institution. Any

bank is subject to liquidity risk. Therefore, measuring and ensuring liquidity is an

important and necessary issue that managers must always grasp to make

appropriate adjustments to each period of the bank. In addition, not only bank

administrators must grasp liquidity risk, but the State Bank's authorities must also

grasp to adjust through the issuance of policies to stabilize liquidity. of the entire

banking system.

From the reality of the global financial crisis in 2008, many economic experts

believe that the cause of the crisis is the weakness of the financial system, the

main point being the lack of liquidity of commercial banks. Many commercial

banks, even though their business is profitable, can still face difficulties in

managing assets and capital effectively, leading to a liquidity crisis. Along with