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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMY HO CHI MINH CITY DUONG THI ANH TIEN MARKET POWER, EFFICIENCY, AND RISK: COMMERCIAL BANKS IN VIETNAM AND ASEAN COUNTRIES Major: Banking and Finance Code: 9340201 SUMMARY OF DOCTORAL THESIS IN ECONOMICS Ho Chi Minh-2023 THE THESIS IS COMPLETED AT: UNIVERSITY OF ECONOMY HO CHI MINH CITY Supervisors: Prof Dr Vo Xuan Vinh Assoc Prof Dr Hoang Duc Referee 1: Referee 2: Referee : The thesis will be examined before the Examination Board, at: ………………………………………………………………… The thesis can be found at: - Library of University of Economics Ho Chi Minh City HCM - National Library LIST OF WORKS RELATED TO THE THESIS HAS BEEN PUBLISHED Author Title Place publication 2017 Factors Affecting the Market Power of Commercial Banks in Vietnam VNU Scientific Journal: Economics and Business, 33(1), 12-22 ISSN: 2615-9287 2019 Competititon Power, Risk and Efficiency: Evidence from Vietnam Commercial Banking System Journal of Science and Technology-Ho Chi Minh City University of Industry, No 42, 3-16 ISSN: 2525-2267 Year of Articles Vo Xuan Vinh & Duong Thi Anh Tien Duong Thi Anh Tien & Pham Viet Hung Journal of Science and Technology-Ho Pham Viet Hung Chi Minh City & Duong Thi 2020 University of Anh Tien Industry, No 46, 86-97 ISSN: 25252267 Proceedings of the ICBF international conference Vo Xuan Vinh; 2020 Relationship Conference Duong Thi Anh granger proceedings Tien causality International between market conference on power, business and efficiency, and finance 2020Effects between Power Market, Efficiency and Risk: Evidence from ASEAN Commercial Banking Systems risk: evidence NXB Lao động from ASEAN (ISBN: 978commercial 604-301-028-2) banking system CHAPTER 1: INTRODUCTION 1.1 Research reason Market power, efficiency, and risk are considered very important factors in the business activities of enterprises Bank efficiency and risk are factors that make a bank survive Efficiency is the bridge through which competition contributes to the stability of banks (Schaeck and Cihák 2014), thereby reducing bank risks Researches around the world show that there is only a one-way relationship between market power, efficiency, and bank risk and the results are still inconsistent, there are big differences in research results Therefore, this issue has formed the question: “What factors are the foundation for increasing market power? Is there a causal relationship between market power, efficiency, and risk in the bank's business activities? This topic is not much researched in emerging financial markets, especially in ASEAN The practical context of ASEAN countries shows that Vietnam is a country with more than 50 banks in operation but lacks a group of banks called "pillar" that can compete with banks of other countries in the region (Tam and Ha, 2012) Therefore, research on factors affecting market power and the relationship between market power, efficiency, and risks of Vietnamese commercial banks contributed to verifying empirical research results for the topic This is the case in ASEAN countries Therefore, the author chooses the topic "Market power, efficiency and risks of commercial banks: The case of Vietnam and ASEAN research thesis 1.2 Objectives of the study countries" as the 1.2.1 General objective The research objective of the thesis is to analyze the factors affecting market power and the relationship between market power, efficiency, and bank risk in the period 2002-2017 in the case of Vietnam and other ASEAN countries 1.2.2 Detail goal First: Analyze factors affecting banking market power in the case of Vietnam and ASEAN countries Second: Analyze cause-and-effect relationships between market power, efficiency, and bank risk in the case of Vietnam and ASEAN countries 1.3 Research question Question 1: What factors affect banking market power, the case of Vietnam and ASEAN countries? Question 2: What are the interaction between market power, efficiency, and risk of banks in Vietnam and ASEAN countries? What is the direction of this relationship? 1.4 Research object and research scope 1.4.1 Research subjects The object of the study is the factors affecting market power and granger causality relationship between market power, efficiency, and risk of commercial banks in Vietnam and ASEAN countries 1.4.2 Research scope Time limit: The topic focuses on the period 2002-2017 Limited space: Research on data of commercial banks in ASEAN countries Content restrictions: The thesis only focuses on studying the factors affecting market power and the Granger causality relationship between market power, efficiency, and risk of commercial banks in Vietnam and ASEAN countries Therefore, market power in this study is only considered in terms of national and enterprise level Bank efficiency is only evaluated in terms of profit efficiency The thesis only studies credit risk and measures it by ratio method from financial statement data 1.5 Research Methods The first objective: The author uses 03 estimation methods which are random effect estimation method, fixed effect estimation method and system generalized moment method The author argues to choose a superior estimation method to analyze the model Second objective: The author uses the panel vector autoregressive (PVAR) method to estimate and analyze the Granger causal relationship between market power, efficiency and bank risk 1.6 The difference to create novelty of the topic Causality testing between market power, efficiency and bank risk for emerging financial markets was carried out across many in ASEAN countries In addition to assessing market power from the perspective of each bank's behavior, this study also examines market power through market concentration to see the difference in bank market power from many other perspectives together Besides, the research adds listing factors and factors in the period before and after the financial crisis 2008 Because this factor affects the market power of banks in each market is different because of the characteristics and the situation of banks in each country is different Regarding the causal relationship research method, using PVAR method gives more reliable results Compared with the previous study, this study evaluates efficiency in terms of profitability (ROA, ROE) because these two profitability indicators both assess the ability and effectiveness of managers in using assets of the company banks to generate operating profit, both reporting cumulative total returns to all shareholders (debt and equity) (Al Nimer et al., 2015) Risk is measured by the Zscore index Conducted in many ASEAN countries, studies with different research spaces and study times will give different results Find out the difference in the results of the two case studies to suggest policies for Vietnamese commercial banks with a more scientific basis A separate research project for the case of Vietnamese commercial banks with additional elements of bank restructuring In addition, this study compares the difference between the research results and the results of previous studies, thereby proposing policy suggestions that have a scientific basis and suitable to the actual situation of operations Vietnamese commercial banks 1.7 Thesis structure The thesis consists of chapters with specific research contents as follows: - Chapter Introduction - Chapter Theoretical foundations and experimental studies - Chapter Research model, methods, and data - Chapter Research results - Chapter Conclusion and policy implications CHAPTER THEORETICAL BASIS AND EXPERIMENTAL RESEARCH 2.1 Theoretical foundations of competition 2.1.1 Concept Banking competition is competition but not annexation and destruction to gain market share to survive and develop through diversifying and improving the quality of products and services provided, creating prestige and reputation of banks in the market 2.1.2 Competitive perspective Classical Competitive Perspective Neoclassical Competitive Perspective Modern competitive perspective 2.2 Theoretical foundations and empirical research on market power 2.2.1 Concept Market power of a bank is the market power created by the bank itself based on opportunities and competitive advantages in the condition of limited resources to maintain and develop, expand market share, increase total assets and cope with adverse changes in the business environment or the pressure of competitive banking forces 2.2.2 Theoretical basis The theory of market-oriented market power Theory of market power based on resources Competency-based theory of market power 2.2.3 Measurement method Market structure method The market unstructured method follows the model of the New Empirical Industrial Organization (NEIO) 2.2.4 Empirical research on factors affecting market power 2.2.4.1 Foreign studies Research by Maudos and Nagore (2005) shows that the factors of size, market structure, and financial structure affect market power Demirguc-Kunt and Martínez Pería (2010) show that, low bank competition due to technological change Anzoategui et al (2010) argue that, competition is strong due to large scale Studies such as Fungáčová et al (2010), Simpasa (2010), Soedarmono et al (2011), Delis (2012), Adjei-Frimpong (2013), Khan et al (2016) focus on factors such as diversification, capital, risk or market concentration, inflation, GDP growth 2.2.4.2 Domestic studies The factors affecting market power are researched with empirical evidence such as: Nhan (2015) indicates technology, scale, profitability, and financial capacity at the bank for Investment and Development of Vietnam (BIDV) Research by Thuy (2015) approaches from the point of view of managers and shows that, management ability, marketing ability, financial capacity, ability to innovate products and services, ability to organize service Service and risk management capabilities positively affect the market power of banks in Ho Chi Minh City Anh (2016) points out the network activities, trade promotion, intelligence, financial potential, prestige factor, and technology factor Tuyen (2018), shows equity, loan balance, cost management, scale, economic growth, and inflation Tran et al (2019) indicates financial capacity, financial service quality, governance capacity, human resources, and technological capacity 2.2.5 Research gaps and comments Research Gap For foreign studies, the impact on market power focuses mainly on the lag factors of bank capital market power, size, customer deposits, and state ownership However, foreign studies have not paid attention to the 2008 financial crisis or the bank's listing problem For domestic studies, many different perspectives have not been analyzed, the research scope is still small, or research has not been done in terms of banking restructuring Comments Up to now, factors affecting banking market power such as bank capital, size, income diversification, customer deposits, state ownership, banking industry development index, market capitalization, etc , asset growth of the banking industry, economic growth of GDP are all interested in empirical studies 10 2.3 Theoretical basis and empirical studies on the relationship between market power, efficiency, and bank risk 2.3.1 Effective concept The effectiveness of commercial banks is the sustainable profitability from lending activities and providing services 2.3.2 Risk concept Similar to the concept of efficiency, the risk is recognized from many different perspectives and perspectives According to Knight (1921), a risk is an unforeseeable but measurable event Meanwhile, the study by Apătăchioae (2015) said that risk is the occurrence of events and the possibility of loss that can destabilize business operations In banking, credit risk is understood, credit risk is understood as the losses occurring in the credit granting process reflected in the financial health of the bank, representing the difference between the rate of return on total assets and the equity ratio with the standard deviation of profitability on total assets in the banking business 2.3.3 The theory of effective competition Structure-Behavior-Efficiency Theory Theory of “Competitive Markets” Theory “Quiet Life” (QL) Effective structural theory 2.3.4 Competition and risk theory Competition-instability theory and competition-stability theory 2.3.5 Theory of risk and effect The relationship between risk and bank performance was originated by Berger and DeYoung (1997), associated with hypotheses named: “bad luck” hypothesis, “bad management” hypothesis, “bad management hypothesis” and “bad luck” hypothesis skimping" and the "moral hazard" hypothesis 11 2.3.6 Empirical studies on the relationship between market power, efficiency, and bank risk 2.3.6.1 Foreign studies Risks and Effects on Market power: The impact of risk on market power is summarized from studies such as Maudos and Nagore (2005), De Guevara et al (2005), De Guevara and Maudos (2007), Kasman and Carvallo (2014), and Tan and Floros (2014) Effect of efficiency on market power such as Demsetz (1973), Weill (2004) and Casu and Girardone (2006) Market power and risk impact on efficiency: The studies of Rossia et al (2005), Saeed and Izzeldin (2016), and Shair et al (2019) were conducted in banks in countries with economies in transition or in Pakistan financial markets Market power and efficiency impact on risk: Fu et al (2014); Tabak et al (2015); Kabir and Worthington (2017); Ariss (2010); Akins et al (2016); Fiordelisi et al (2011); Tan and Floros (2013b) were conducted in financial markets in Asia, Brazil, Islamic banking, the US, or China The causal relationship between market power, efficiency, and risk: Research results of Radić et al (2011) demonstrate that market power tends to be concentrated in investment banks in less competitive market conditions The results of this study support the competitive-stable view of Boyd and De Nicolo (2005) In addition, the results of this study suggest that there is a trade-off between short-term business cost effectiveness and future risk issues, and support the 'skimping' hypothesis of the Berger and DeYoung (1997) Research by Kasman and Carvallo (2014) found evidence "Quiet Life" hypothesis of Hicks (1939), that based on market influence power, bank managers subjectively loosen their management, resulting in reduced cost 12 effectiveness and revenue efficiency In addition, the research results also show that financial stability positively contributes to improving and enhancing the market power of commercial banks in the US In the Chinese financial market, from 2002 to 2013, recent research by Tan and Floros (2018) shows that there is a causal relationship between efficiency and bank risk In addition, the research results also show that the higher the banking competition, the tighter the credit supervision should be, thus limiting the risks, especially credit risk and liquidity risk 2.3.6.2 Domestic studies Research by Thom & Thuy (2016) shows a one-way relationship between competition on bank performance; Vinh & Mai (2015) shows that income diversification has an impact on profitability; Vinh & Kiem (2016a) shows a one-way relationship between market power on risk and bank profitability; Nguyen & Phan (2017) finds a nonlinear relationship between competition and efficiency; Chau (2018) shows a causal relationship between bad debt and cost-effectiveness; Ngoc Tho et al (2019) show that there is a one-way relationship between market concentration and bank efficiency; Vinh (2020) shows a supply-side relationship between bad debt and costeffectiveness 2.3.7 Research gaps and comments Research Gap Do one-way relationship research This causal relationship has mostly been studied in developed financial markets, but has not been tested for emerging financial markets such as ASEAN Conduct research on the relationship individually for each pair of variables, not simultaneously for all 03 variables of market power, efficiency and risk 13 The causal relationship between market power, efficiency, and bank risk, studies with different research spaces and time will give dissimilar results The PVAR method has not been implemented to study the concurrent impact for this relationship Comment Academically and practically, previous research results suggest that, in a competitive market context, there is a trade-off in the relationship between efficiency and risk, or between market power and risks in business operations, or between the efficiency and market power of banks From there, bank managers adjust business strategies accordingly In general, from the gap of previous studies and the actual situation, it once again shows the reason why it is necessary to study the causal relationship between the factors of efficiency, market power and risk of banking Particularly for the case of Vietnam, the topic considers issues related to the relationship of this topic to suit the practical situation as follows: First, the 2008 financial crisis was the result of a hot economy Many adverse fluctuations from the economy negatively affected the business activities of commercial banks, leading to a decline in the value of total bank assets, thereby adversely affecting economic efficiency and market power as well as increasing risks for commercial banks Secondly, in the financial market during the research period, macro managers continuously adjusted interest rates at high and unstable levels, affecting business activities and reducing profitability on the market deposit and lending markets, reducing the market power of banks and causing many risks in business Third, the Vietnamese banking market is becoming more and more competitive It is from market pressure that market power has been and 14 continues to be a topical issue that attracts great attention from both research perspective, commercial bank managers, macro managers and stakeholders to evaluate the development of banks in the long term Finaly, the credit quality of Vietnamese commercial banks has deteriorated, bad debts increase, the greater the bank's risks, affecting the operational efficiency and market power of banks 2.3.8 Research hypothesis on the relationship between market power, efficiency, and bank risk The thesis proposes three hypotheses as follows: H14: Both risks and effects affect market power H15: Market powerand risk both affect the efficiency H16: Market power and efficiency both affect risk CHAPTER RESEARCH MODELS, METHODS, AND DATA 3.1 Research model of factors affecting bank market power 3.1.1 Research models The dynamic research model proposed in this thesis is as follows: Compit =¿α, Compi , t−1 , Equity it ,¿ ¿ it , Siz e 2it Diver it , Deposit it ,¿ SO it , A−Groit , BSD t , SMD t , Gdp t , IFR t , Listed it Crisist ,u ¿ (3.1) The case of Vietnam is added to the restructuring variable model 3.1.2 Measurement of model variables Banking market power Calculated by Lerner index through the Lerner it = (Pit-MCit)/Pit, where P is called the output price and is calculated as total revenue over total assets, MC is the marginal cost of the bank, i is the n bank, t is the time; and the HHI index is calculated by the formula HHI =∑ M S i where MSi2 is the sum of squared market share of bank i i=1 Equity: is calculated by the ratio of equity to total assets 15 Size is calculated by the logarithm of total assets Considering the nonlinearity of the scale of the thesis using the variable Size2 and calculated by the logarithm of total squared assets Diversification is calculated as non-interest income/total assets Customer deposits (Deposit) calculated as the ratio of customer deposits to total assets State ownership (SO), Value 1: state-owned banks; equal to 0: owned banks are non-state shareholders Control variables + The lag of the dependent variable (Comp t-1): Determined by the value of the competitive competitive dependent variable in the previous year (year t-1) + Asset growth (A-Gro): Calculated through the formula: (Total assets in year t – total assets in year (t-1))/Total assets in year (t-1) + Sector Development Index (BSD): Measured by total banking assets over GDP + Capitalization (SMD): Market capitalization/GDP Economic growth (GDP): Calculated as a percentage of the annual GDP growth of each country + Inflation (IFR): This variable is calculated from the annual inflation rate of each country + Listed: Get value equal to for listed banks and for unlisted banks + Financial crisis of 2008 (Crisis): Get value equal to period after 2008 and equal to period before 2008 + Restructuring (Dres): is equal to for the years 2011-2017 and equal to for the remaining years of the period 2002-2017 16 3.2 Research model of the relationship between market power, efficiency, and bank risk 3.2.1 Research models The author proposes the research model of the thesis as follows: Comp=f ¿ ) Eff =f ¿) Risk=f ¿) (3.2) (3.3) (3.4) where: Comp is market power, Eff is efficiency, Risk is a risk, i is the bank, t is the year, lag is lag, ɛ it= ηi+ μit where ηi is the error of unobserved variable, μ is the random error 3.2.2 Measuring model variables studies the relationship between market power, efficiency, and risk Market power: The author proposes only the Lerner index Efficiency: Calculated according to the ratio ROA and ROE Risk: Calculated by Zscore = (ROA+E/TA)/δROA.ROA where E is the total equity, TA is the total assets of the bank, δROA.ROA is the standard deviation of net return on total assets 3.3 Research Methods To accomplish the first objective: The author uses the two-step SGMM method based on the difference of Arellano and Bond (1991) which is reliable compared to FEM and Rem for analysis Implementation of the second objective: The author uses PVAR estimation method and Granger causal analysis technique 3.4 Methods of data collection and processing 3.4.1 Describe the data collection process Select research subjects are commercial banks, including listed and unlisted commercial banks Eliminate banks with less than 05 consecutive reporting years and the most recent reporting year less than 2016