Factors affecting the liquidity risk of commercial banks in vietnam

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: 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: 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 1.2 OBJECTIVES OF STUDY 1.2.1 General objective 1.2.2 Specific objective 1.3 RESEARCH QUESTION 1.4 SUBJECT AND SCOPE OF THE STUDY 1.4.1 Research Subject 1.4.2 Scope of the study 1.5 RESEARCH METHODOGY 1.6 CONTRIBUTIONS 1.7 DISSERTATION STRUCTURE CHAPTER II: LITERATURE REVIEW 2.1 THEORY OF LIQUIDITY RISK OF JOIN-STOCK COMMERCIAL BANKS 2.1.1 Commercial banks 2.1.2 Bank liquidity risk 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 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 Acronyms LIST OF 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 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 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 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 88 A11 Autocorrelation test xtserial fgap roe nim gdp inf size cap ldr tla llr cr3 m2 agdp Wooldridge test for autocorrelation in panel data H0: no first-order autocorrelation F( 1, 30) = 32.275 Prob > F = 0.0000 A12 FGLS regression 89 xtgls fgap roe nim gdp inf size cap ldr tla llr cr3 m2 agdp, panel(h) corr(ar1) force Cross-sectional time-series FGLS regression Coefficients: Panels: Correlation: generalized least squares heteroskedastic common AR(1) coefficient for all panels Estimated covariances = Estimated autocorrelations = Estimated coefficients = fgap Coef roe nim gdp inf size cap ldr tla llr cr3 m2 agdp _cons -.0659736 6229153 -1.189934 3410806 0468035 154115 -.3172538 1.660161 -2.055985 1.164438 1381007 -.0383827 -.7540165 31 13 Std Err .0561918 3517279 5703915 0871564 0140782 0453878 028641 0420304 4171082 5444911 0458312 0746991 1558544 A13 Comparison between models (0.3954) Number of obs Number of groups Obs per group: avg max Wald chi2(12) Prob > chi2 z -1.17 1.77 -2.09 3.91 3.32 3.40 -11.08 39.50 -4.93 2.14 3.01 -0.51 -4.84 P>|z| 0.240 0.077 0.037 0.000 0.001 0.001 0.000 0.000 0.000 0.032 0.003 0.607 0.000 = = 260 31 = = = = = 8.387097 10 2601.95 0.0000 [95% Conf Interval] -.1761074 -.0664587 -2.307881 1702572 0192107 0651566 -.373389 1.577782 -2.873502 0972555 0482732 -.1847902 -1.059485 0441603 1.312289 -.0719877 5119039 0743962 2430734 -.2611185 1.742539 -1.238468 2.231621 2279283 1080249 -.4485475 90 esttab pooled fem rem xtgls, r2 star(* 0.1 ** 0.05 *** 0.01) (1) fgap roe nim gdp -0.176** (-2.18) 1.723*** (4.01) -0.918 (-1.05) (2) fgap (3) fgap (4) fgap -0.0630 (-0.80) -0.0779 (-1.03) -0.0660 (-1.17) 0.310 (0.79) 0.540 (1.41) -0.506 (-0.60) -1.035 (-1.41) inf 0.287** (2.19) 0.181 (1.48) size 0.0394** (2.31) -0.0169 (-0.44) cap 0.0727** (2.49) ldr 0.215** (1.98) -0.00428 (-0.17) 0.623* (1.77) -1.190** (-2.09) 0.341*** (3.91) 0.0468*** (3.32) 0.424*** (3.46) 0.171*** (3.24) 0.154*** (3.40) -0.300*** (-8.41) -0.286*** (-8.33) -0.288*** (-8.82) -0.317*** (-11.08) tla 1.562*** (32.67) 1.635*** (29.54) 1.641*** (32.81) 1.660*** (39.50) llr -2.101** (-2.52) -1.762** (-2.37) -1.675** (-2.30) -2.056*** (-4.93) cr3 0.405 (0.40) 0.0830 (0.11) 0.279 (0.38) 1.164** (2.14) m2 0.114 (1.58) 0.0460 (0.72) 0.0766 (1.33) 0.138*** (3.01) agdp 0.0325 (0.33) 0.267 (1.24) 0.199 (1.31) -0.171 (-0.51) -0.245 (-1.01) 260 0.873 260 _cons N R-sq -0.577*** (-2.64) 260 0.879 t statistics in parentheses * p