Factors affecting the liquidity risk of joint stock commercial banks on stock exchanges in Viet Nam: Bachelor thesis of Banking and Finance / Nguyen Thu Ngan ; supervisor Dang Van Dan

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

FACTORS AFFECTING THE LIQUIDITY RISK OF

JOINT STOCK COMMERCIAL BANKS ON STOCK

EXCHANGES IN VIETNAM

GRADUATION DISSERTATION

SPECIALIZED: BANKING AND FINANCE

CODE: 52340201

HO CHI MINH CITY, JANUARY 2020

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

FACTORS AFFECTING THE LIQUIDITY RISK OF

JOINT STOCK COMMERCIAL BANKS ON STOCK

EXCHANGES IN VIETNAM

GRADUATION DISSERTATION

SPECIALIZED: BANKING AND FINANCE

CODE: 52340201

INSTRUCTOR:

HO CHI MINH CITY, JANUARY 2020

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ABSTRACT

Liquidity problems are re-emphasised as Vietnamese commercial banks are

making an effort in deploying Basel II for hoping a greater stability and decrease

the likelihood of repeating the financial crisis events in 2007. Therefore, the aim of

this research is to identify factors that affect liquidity risk of 17 Joint-stock

commercial banks listed on stock exchanges in Vietnam and the data covers the

period from 2010 to 2018. Multivariate regression models (Pooled-OLS, FEM,

REM) were used to test the effects and levels of determinants; and after being

selected by F-test and Hausman test, REM was the most appropriate. However,

REM had heteroscedasticity in variance of error and plus, autocorrelation in the

dataset. Therefore, FGLS regression model is used to fix autocorrelation and

unconstant variance of error to ensure a consistent and effective estimation.

The result reveals that from 2010 to 2018, size of the bank and the ratio of

equity to total assets have positive effects on liquidity risk and this can be explained

by the famous “too big to fail” theory that big banks are seemed to secure against

liquidity risk exposure not by holding high liquidity, but by assistance from

interbank market or Lender of Last Resort (Vodova, 2013); plus, equity is

considered as one of the last defense, a shield that against many kinds of risk. If

banks see themselves as “big banks”, their motivation to hold liquidity is limited.

Besides, the relation between liquidity risk and return on equity, non-performing

loan ratio and provision credit losses ratio is ambiguous.

From the result obtained, the study proposes conclusions and a number of

recommendations to banks themselves to increase the efficiency and improve the

liquidity of Vietnamese commercial banks, as well as to the Governement on the

management of the banking system in the coming period.

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SUMMARY

In recent year, along with the emergence of globalization and free trade,

economic individuals have created an environment of growth and competition.

Financial markets are no exception, particularly the commercial banks –

intermediaries that connect individuals, companies and other institutions together,

keep the economy going. In addition to competition from domestic financial

institutions, banks also face foreign financial ones which enter Vietnam gradually.

Banking industry is obviously one of the most sentimental activities not just in

Vietnam but worldwide and plays an extremely important role in economic

development. Banks not only influence but also promote the integration of

economic activities such as resource mobilization, development activities,

allocation of public finance and even social welfare distribution. The administration

of banking is therefore always a matter of particular concern for the government to

carry out its management and supervisory activities. Banks need to adapt, thrive and

evolve effectively to survive in harsh environments, if they do not, they will be

eliminated. With a default of one bank, it could lead to the collapse of the entire

financial and economic system due to its interconnectability. Global financial crisis

that happened in 2007 could be a typical example of the banks’ strong influence on

the economy that led to a series of bankruptcy, pushing the economic stagnation to

its peak.

Besides, the stock market in Vietnam is still quite young, the financial system is

not really healthy and open, creating difficulties and barriers for banking activities.

Thus, as liquidity problems are re-emphasised as Vietnamese commercial banks are

making an effort in deploying Basel II for hoping a greater stability and decrease

the likelihood of repeating the financial crisis events in 2007. Moreover, after

joining the ASEAN Economic Community in 2015, Vietnam has committed itself

to alleviating restrictions in the banking sector, giving this sector many

oppoturnities; but also many challenges such as competitive pressure from regional

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banks and international banks, in particular with regard to the limited financial

potential of Vietnam compared to other banks in other countries.

Therefore, the aim of this research is to identify factors that affect liquidity risk

of Joint-stock commercial banks listed on stock exchanges in Vietnam. If the banks

have strong liquidity, this not only helps to stabilize the financial market but also

helps to grow the economy in Vietnam. Thus, to determine and evaluate the level of

impact of these determinants and give conclusions and recommendation from the

obtained results.

This research systematized the theoretical framework including theory

definitions and liquidity risk impacts to the customers, the bank itself and the

economy; and then evaluated the factors affecting liquidity risk in Vietnamese

commercial banks and give empirical evidence based on previous studies. There are

two basic types of determinants of liquidity risk which are objective factors and

subjective factors. However, due to limited time, the author only focused on

subjective factors without considering the affect of factors on “market” level and

government policies on bank liquidity. Model of this research is based on Vodova

(2011) and Trương Quang Thông (2013) panel data regression models as follows:

In which, LR is liquidity risk as a dependent variable; ETA, NPL, ROE,

LnSIZE, PCL is ratio of equity to assets, non-performing loan ratio, return on

equity, size of the bank, provision for credit losses respectively as independent

variables; is error term; is the 17 joint-stock commercial banks according to the

list on the Government’s website; is the year from 2010 to 2018. The data was

collected from financial statements of 17 Join-stock commercial banks that listed on

stock exchanges in Vietnam. The estimated effects have also been presented with a

positive correlation between LR and ROE, LnSIZE, PCL and a negative correlation

between LR and ETA, NPL.

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Stata software was then used to describe statistically the dataset and test the

correlation matrix between variables and the result was that ETA has a negative

correlation with LR, whereas ROE and LnSIZE has a positive correlation with LR.

Multivariate regression models (Pooled-OLS, FEM, REM) were used to test the

effects and levels of determinants; and after being selected by F-test and Hausman

test, REM was the most appropriate. Although REM did not have multi-collinearity

phenomenon, it still had heteroscedasticity in variance of error and plus,

autocorrelation in the dataset. Therefore, FGLS was used to fix autocorrelation and

unconstant variance of error to ensure a consistent and effective estimation. The

result is as follows:

Due to the characteristics of FGLS, the R2

value does not count as meaningful

when it comes to measure the suitability of the model, however, it can be used to

calculate statistical values as above. Whereby, both ETA and LnSIZE has positive

effects on LR. Firstly, the higher bank’s size, the higher liquidity risk exposure

which is consistent with hypothesis H4. This result can be explained by the “Too big

to fail” theory as big banks are seemed to secure against liquidity risk exposure not

by holding high liquidity, but by assistance from interbank market or Lender of Last

Resort (Vodova, 2013). Secondly, there is a strong positive effect of the ratio of

equity-to-assets to liquidity risk meaning when the ratio of equity-to-assets

decreases, liquidity risk will decrease as well. This result is inconsistent with

hypothesis H1, but suprisingly consistent with the result on the influence of the

bank’s size on liquidity risk. Equity is considered as one of the last defense, a shield

that against many kinds of risk. If banks see themselves as “big banks”, their

motivation to hold liquidity is limited. This result is in line with the result of Trương

Quang Thông (2013). However, the relation between liquidity risk and return on

equity, non-performing loan ratio and provision credit losses ratio is ambiguous.

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From the result obtained, the study proposes a number of conclusions and

recommendations to increase the efficiency and improve the liquidity of

Vietnamese commercial banks in the coming period.

Particularly, due to banks’ reliance too much on the Gorvernment, the

Government has enacted the Law Amendments to some articles of the Law on

Credit Institutions (Law No. 17/2017/QH14), is effective from January 15, 2018

that banks can be able to go bankrupt if they are poorly operating and are put under

special control by the Government, which has changed entire situation. Therefore,

banks need to rely more on themselves than on passive strategies as they used to,

which is why the author then gave some recommendations to banks themselves to

improve their liquidity and operational management, as well as some

recommendations to the Governement on the management of the banking system. In

particular, banks need to strengthen internal control system, ensure capital

mobilization, prepare specific plans for upcoming risk cases from the best to the

worst. The Government needs to their leadership role for banks, inspect and control

banking activities effectively, improve the organizational structure and apply

effectively the Basel’s principles on managing liquidity.

However, there still exists some limits of this research such as: this research is

only conducted on join-stock commercial banks, not the whole banking system in

Vietnam; the author only used one measurement to measure liquidity of the bank;

the result of FGLS model can not be given out R-squared value to measure the

suitability of the model; this study only conducted internal determinants. Therefore,

the author hopes to study further to provide a more general measurement of

liquidity risk, plus to build a better model to make it a more useful reference for

students’ extensive researches.

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ASSURANCE LETTER

I assure that the “factors affecting liquidity risk of joint-stock commercial banks

on stock exchanges 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.

Author

Nguy n Thu Ng n