Factors affecting the liquidity risk of commercial Banks in Vietnam, 2022

STATE BANK OF VIETNAM MINISTRY OF EDUCATION & TRAINING

HO CHI MINH UNIVERSITY OF BANKING

HO CHI MINH

UNIVERSITY OF BANKING

NGO DANG QUYNH NHI

FACTORS AFFECTING THE LIQUIDITY RISK OF

COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS

THE MAJOR: FINANCE AND BANKING

CODE: 7 34 02 01

HO CHI MINH CITY, 2022

ii

STATE BANK OF VIETNAM MINISTRY OF EDUCATION &TRAINING

HO CHI MINH UNIVERSITY OF BANKING

STUDENT: NGO DANG QUYNH NHI

STUDENT ID: 050606180273

CLASS: HQ6-GE12

FACTORS AFFECTING THE LIQUIDITY RISK OF

COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS

THE MAJOR: FINANCE AND BANKING

CODE: 7 34 02 01

SUPERVISOR

ASSOC.PROF. PhD DANG VAN DAN

HO CHI MINH CITY, 2022

I

ABSTRACT

The topic name: Factors effecting the liquidity risk of commercial banks in

Vietnam.

The study's major objectives are to identify characteristics that explain liquidity

risk in Vietnamese commercial banks and assess their impact on the risk. Following

that, many policy implications and proposals to improve banks' liquidity ability and

prevent abrupt liquidity shocks will be presented. The study's contents include the

following: To begin, the study's emergence stems from a requirement among

commercial banks to reduce liquidity risk in the face of increasing competition.

Secondly, the study examines existing domestic and international research on liquidity

risk factors in order to use them as a theoretical foundation and to inherit the research

models. Thirdly, the research data was gathered from the financial reports of 31

Vietnamese commercial banks from 2009 to 2019. The author employs a wide range of

techniques, including qualitative (description, comparison, analysis, etc.) and

quantitative procedures Pooled OLS, FEM, REM, and FGLS models are used in

particular to regress panel data in research.

Finally, the analysis, remarks, and conclusion are all proven based on the research

findings, in order to propose the author's proposals for avoiding liquidity risk in banks'

operations. The author expects that this study will serve as a reference in the future and

that the research findings will be valuable to bank administrators, legislators, and other

scholars.

Keywords: Liquidity risk, FGLS, Profit, Joint Stock Commercial Bank, Vietnam

II

ASSURANCE LETTER

My name is Ngo Dang Quynh Nhi and I am a student at the Banking University of Ho

Chi Minh City, class HQ6 – GE12, student number: 050606180273. I assure that the

“Factors affecting the liquidity risk of commercial banks in Vietnam” dissertation is my

own report. The figures and sources of information in this research are derived clearly

and honestly from the banks' consolidated financial statements. In addition, the tests

were conducted publicly and transparently with no intervention to correct the results of

regression models, in which there are no previously published content or content made

by others except for full citations in the report.

HCM City, 10 November, 2022

Author

Ngo Dang Quynh Nhi

III

ACKNOWLEDGEMENT

I would like to thank the teachers and friends in the Banking University in Ho Chi Minh

city and with the deepest gratitude, I would like to send to the personnel in the

Department of Finance and Department of Banking the most sincerely thanks for the

knowledge and dedication, who has devoted to us during our school time. Especially in

the program of implementing the graduation dissertation with the guidance of association

Professor and Doctor of Philosophy Dang Van Dan, I have been helped a lot in choosing

the topic, writing the research, as well as in-depth guidance in how to work properly.

Finally, I would like to thank my family, friends and relatives who have always been

there to support and encourage me to complete my graduation dissertation.

I sincerely thank!

IV

TABLE OF CONTENTS

ABSTRACT..................................................................................................................... I

ASSURANCE LETTER.................................................................................................II

ACKNOWLEDGEMENT .............................................................................................III

TABLE OF CONTENTS...............................................................................................IV

LIST OF ACRONYMS..................................................................................................VI

1.1 RESEARCH MOTIVATIONS ...............................................................................1

1.2 OBJECTIVES OF STUDY .....................................................................................2

1.2.1. General objective ...................................................................................................2

1.2.2. Specific objective ...................................................................................................2

1.3 RESEARCH QUESTION .......................................................................................3

1.4 SUBJECT AND SCOPE OF THE STUDY ...........................................................3

1.4.1. Research Subject ....................................................................................................3

1.4.2. Scope of the study ..................................................................................................4

1.5 RESEARCH METHODOGY .................................................................................4

1.6 CONTRIBUTIONS..................................................................................................5

1.7 DISSERTATION STRUCTURE............................................................................5

CHAPTER II: LITERATURE REVIEW ........................................................................8

2.1 THEORY OF LIQUIDITY RISK OF JOIN-STOCK COMMERCIAL

BANKS ............................................................................................................................8

2.1.1. Commercial banks..................................................................................................8

2.1.2. Bank liquidity risk..................................................................................................9

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

2.1.4. Liquidity reserve ..................................................................................................13

2.2 LITERATURE REVIEW......................................................................................14

2.3 HYPOTHESES DEVELOPMENT ......................................................................18

2.3.1. Internal hypotheses...............................................................................................18

2.3.2. External hypotheses .............................................................................................21

CHAPTER III: RESEARCH METHODS ................................................................24

V

3.1 DATA COLLECTION:.........................................................................................24

3.2 RESEARCH MODELS .........................................................................................26

3.3 DESCRIPTION VARIABLE AND RESEARCH HYPOTHESIS....................29

3.3.1. Dependent variable – Funding gap (FGAP) ........................................................29

3.3.2. The independent variables....................................................................................29

3.3.3. Macro factors .......................................................................................................32

3.4 RESEARCH PROCESS ........................................................................................35

3.5. RESEARCH METHODS .....................................................................................39

3.5.1. Ordinary Least Squares (OLS).............................................................................39

3.5.2. Fixed Effect Model (FEM)...................................................................................39

3.5.3. Random Effect Model (REM)..............................................................................39

3.5.4. Feasible Generalized Least Square (FGLS).........................................................39

CHAPTER IV: RESEARCH RESULTS AND DISCUSSION.....................................41

4.1 DESCRIPTIVE STATISTICAL ..........................................................................41

4.2 CORRELATION ANALYSIS OF VARIABLES ...............................................45

4.3 MULTICOLLINEARITY TEST..........................................................................47

4.4 ESTIMATED THE POOLED OLS, FEM, REM MODELS.............................48

4.5 SELECTION TEST OF 3 MODELS POOLED OLS AND FEM.....................52

4.5.1. Model defect testing.............................................................................................53

4.5.2. Homoscedasticity test...........................................................................................53

4.5.3. Autocorrelation test..............................................................................................54

4.6 ESTIMATED THE FGLS.....................................................................................55

4.6.1. Comparison between models ...............................................................................56

4.7 RESULTS DISCUSSION ......................................................................................58

CHAPTER V: CONCLUSIONS AND RECOMMENDATIONS ................................69

5.1 CONCLUSION.......................................................................................................69

5.2 RESOLUTION .......................................................................................................72

5.2.1. Improvement of collateral....................................................................................72

5.3.1. Limits of the research...........................................................................................74

VI

5.3.2. Direction for extensive research ..........................................................................75

REFERENCES...............................................................................................................77

APPENDIX....................................................................................................................80

LIST OF ACRONYMS

Acronyms English

FGAP Funding Gap

ROE Return on equity

NIM Net Interest Margin

LDR Loan-to-deposit ratio

SIZE Natural log of total asset

CAP Equity ratio

LLR Loan loss reserves

TLA Total loans ratio

M2 Money Supply

INF Inflation

GDP Economic growth

AGDP Industry growth

CR3 Industry concentration

FEM Fixed Effect Model

REM Random Effect Model

VIF Variance Inflation Factors

FGLS Feasible Generalized Least Square

OLS Ordinary Least Squares

1

CHAPTER I: INTRODUCTION

1.1 RESEARCH MOTIVATIONS

Banking is one of the most sentitive industries not only in Vietnam but also throughout

the word and it plays an role in the economic development. Banks do not only affect but

also facilitate the intergration economic activities activities such as mobilizing

resources,production activities, public finance distribution and evendistribution of social

welfare.Therefore, banking management is always a matter of special concern by

government carrying out management and supervision activities.

Liquidity risk occurs when a bank is insolvent, cannot convert assets into cash in time or

cannot borrow to meet the needs of payment contracts. Thus, if a bank does not have the

necessary capital to meet the needs of the market, it may become insolvent. If liquidity

risk occurs, the impact will not only be limited to a single bank, but also strongly affect

other banks and the entire financial system. A typical example of the banks’ heavy

influence on economy is the global financial crisis that happened in 2007 which led to a

series of bankruptcies, bringing, the economic stagnation to its peak. According to Bank

for International Settlements, during global financial crisis, many banks struggled to

sustain adequate liquidity, a number of banks still failed, being forced into mergers even

when receiving extraordinary support from the central banks. Several years before the

crisis, liquidity and its management was not really a priority, funding was available at

low cost. However, this crisis has totally changed market conditions that captured the

importance of related liquidity issues measurement thus its management.

Liquidity risk has an impact on a bank's performance as well as its reputation (Jenkinson,

2008). Furthermore, a low liquidity position may result in regulatory penalties. As a

result, maintaining a sound liquidity structure becomes critical for a bank. Liquidity risk

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has emerged as a major worry and challenge for banks in the modern period. A bank

with good asset quality, strong earnings, and sufficient capital may fail if it is not

maintaining adequate liquidity.

From that, it shows that the importance of assessing the liquidity risk of Vietnamese

commercial banks at this stage is very important. Light liquidity risk will reduce the

bank’s profitability, if severe, it can lead to bankruptcy. Therefore, one of the most

important tasks of bank managers is to ensure reasonable liquidity and provision for

liquidity risk. A bank is considered to have good liquidity if it has easy access to available

capital at a reasonable cost and at the right time. However, a large amount of capital

reserve will directly affect the profitability of the bank’s investment. Liquidity risk is

influenced by many factors, both internal and external to the bank.Therefore, studying

the impact of factors will be very important to limit liquidity risk in banking activities.

Stemming from the above reasons, the author has chosen to carry out the research topic

"Factors affecting the liquidity risk of Vietnamese commercial banks" to study to

show the factors that have affected the liquidity risk of the Bank, besides, there are

proposed methods to improve the liquidity of Vietnamese commercial banks.

1.2 OBJECTIVES OF STUDY

1.2.1. General objective

Understanding the impact of a number of factors on the liquidity of Vietnamese

commercial banks in the context of Vietnam in the period 2009-2019

1.2.2. Specific objective

Build models based on previous studies.

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- Verify the impact of these factors on the liquidity risk of Vietnam Joint Stock

Commercial Bank.

- Proposing solutions and recommendations for joint stock commercial banks to improve

the liquidity risk of Vietnam joint stock commercial banks, limiting the impact on the

liquidity risk of commercial banks.

1.3 RESEARCH QUESTION

In order to achieve the research purpose as mentioned above, this thesis is conducted to

answer the following questions in turn:

- What are the determining factors affecting the liquidity risk of Vietnamese commercial

banks?

- What model and method to measure the liquidity risk of Vietnamese commercial

banks?

- How is the impact of the liquidity risk of Vietnamese commercial banks?

- Based on the research results, What solutions to improve the liquidity risk of

Vietnamese commercial banks?

1.4 SUBJECT AND SCOPE OF THE STUDY

1.4.1. Research Subject

The object of this research is the financial capacity of commercial banks, the factors

affecting the liquidity of commercial banks in Vietnam