The impacts of capital inflows on bank lending in asean 6 emerging economies

BANKING ACADEMY OF VIETNAM SUMMARY REPORT RESEARCH TOPIC PARTICIPATING IN “SCIENTIFIC RESEARCH STUDENTS AT BANKING ACADEMY COMPETITION 2021-2022” TOPIC: THE IMPACTS OF CAPITAL INFLOWS ON BANK LENDING IN ASEAN-6 EMERGING ECONOMIES FIELDS: Social Scientific MAJOR: Business and Economic Ha Noi, May 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129035291000000 HỌC VIỆN NGÂN HÀNG THÔNG TIN SINH VIÊN THỰC HIỆN ĐỀ TÀI Tên đề tài: The impacts of capital inflows on bank lending in ASEAN-6 emerging economies Lĩnh vực: Khoa học Xã hội Chuyên ngành: Ngân hàng Giáo viên hướng dẫn: Họ tên: Lê Hải Trung Học hàm, học vị: Tiến sĩ Chức vụ: Phó trưởng khoa Ngân hàng Điện thoại: +84 848475689 Email: trunglh@hvnh.edu.vn Sinh viên/nhóm sinh viên thực đề tài: (In đậm thông tin Sinh viên chịu trách nhiệm chính) STT Họ Mã số SV tên Lớp Khoa ĐH Điện thoại năm thứ Nguyễn 21A4010917 K21CLCA Ngân Thị hàng Email 0969762588 Ntnhung221200@gmail.com Nhung Phạm Ngọc Nguyệt Minh 21A4010886 K21CLCA Ngân hàng 0948752583 minhphamsm@gmail.com Lựa chọn đề tài tham dự thi (Tích dấu X vào ô lựa chọn) Cuộc thi cấp Bộ GDĐT x Cuộc thi Euréka Ngoài việc tham khảo Sinh viên lựa chọn tham gia thi, Hội đồng Khoa học Học viện xem xét định lựa chọn đề tài gửi dự thi theo tiêu chí thi Ngày tháng năm Sinh viên chịu trách nhiệm thực đề tài (ký ghi rõ họ tên) i TABLE OF CONTENTS LIST OF TABLES iii LIST OF ACRONYMS iii INTRODUCTION 1.1 Background of the research: 1.2 Objectives: 1.3 Research subjects and scope of work: 1.4 Research methodology: 1.5 Research structure: 1.6 Contribution of the research CHAPTER 1: LITERATURE REVIEW 1.1 Impacts of international capital inflows on the emerging markets: 1.2 Impacts of capital inflows on bank lending 11 1.2.1 Impacts of capital inflows on credit expansion: 11 1.2.2 Impacts of capital inflows on bank credit risk 13 1.2.4 Impacts of components of capital flows on bank lending: 15 1.2.5 The impacts of capital inflows on bank lending during the crisis: 16 1.3 Research gap: 17 CHAPTER 2: RESEARCH DATA AND METHODOLOGY 19 2.1 Research model 19 2.1.1 Dataset: 19 2.1.2 Econometric specifications: 19 2.2 Hypothesis developments: 21 2.2.1 Capital flows components: 22 ii 2.2.2 Bank size: 22 2.2.3 Income diversification: 23 2.2.4 Capital-to-asset ratio: 23 2.2.5 Liquidity: 24 2.2.6 Macroeconomic factors: 24 CHAPTER 3: RESULTS AND DISCUSSION 26 3.1 Summary statistics 26 3.2 Empirical results 27 3.2.1 Baseline results 27 3.2.2 Impacts of bank size: 30 3.2.3 Impacts of Global financial crisis and Covid-19 pandemic 32 CHAPTER 4: RECOMMENDATIONS 35 CONCLUSION Error! Bookmark not defined REFFERENCES 38 APPENDICES 47 iii LIST OF TABLES Table Page Table 1: Description of the variables 20-21 Table 2: Descriptive statistics 26-27 Table Baseline results 29 Table 4: Impacts of bank size 30-31 Table Impacts of Global financial crisis and Covid-19 pandemic 32-33 LIST OF ACRONYMS Abbreviation Interpretation ASEAN Association Of South East Asian Nations EME Emerging economy FDI Foreign direct investments FE Fixed effect GDP Gross domestic product GFC Global financial crisis GMM Generalized Method of Moments PI Portfolio investment ODI Outward direct investment OI Other investment CI Capital inflows INTRODUCTION 1.1 Background of the research: The increasing financial integration for years has led to tremendous capital inflows in emerging countries However, the impacts of international capital inflows on emerging markets are ambiguous On the one hand, the international capital inflows help supplement domestic finance, transferring the general knowledge and advanced production technologies to support economic growth in emerging countries (Igan et al., 2020; Benigno et al., 2015; Aizenman et al., 2013; Ali & Iness, 2020) On the other hand, substantial capital inflows are expected to linked with the large exchange rate appreciations or higher inflation, leading to the sharp increase of assets and rising the possibility of abroad currency liabilities of the economy (Furceri et al., 2012) Moreover, foreign capital is typically marked by significant fluctuations with sharp retrenchments during volatile periods, which also expose the developing markets to macroeconomic instability by external shocks and global uncertainty (Kim and Singal, 2000, Forbes and Warnock, 2012) Therefore, understanding the impacts of capital flows is of particular importance to the financial stability in the emerging markets due to underdeveloped institutions and banking systems Despite a large body of literature, the impacts of international capital inflows on emerging countries remain to be an open empirical question (Kose et al., 2009) It is found in several studies that capital flows and macroeconomic volatility in developing markets are associated with each other However, the link is stated to rely on various aspects can be named as the features of flows or the rate of economic thrive in the country by Kose, Prasad, and Terrones (2003) and also or the characteristics of each nation by Milesi-Ferretti & Tille (2011) and Ahmed & Suardi (2009) In particular, fluctuations in foreign capital could have significant impacts on the banking system of the emerging markets According to Ali & Iness (2020), it is stated that because the abundance of credit, with the low level of interest rate in banks, enterprises will be able to access more capital, which will improve their performance and ability to repay debt, hence reducing financial vulnerabilities From impacts of bank-characterised indicators, the inflows of capital impact banking systems in various aspects of their business, including bank credit (Mara et al., 2021), and risk-taking (Rumondor & Bary, 2020; Dinger & Kaat, 2020) It is highlighted the impacts of international movements of capital on the banking system are quite related with features of a lax monetary policy (Dinger & Kaat (2020) In addition, lending is the main activity in commercial banks and brings a high proportion of income to banks Needless to say, estimating the impacts of capital inflows in terms of bank lending attracts a lot of attention from scholars all over the world for the investigation At the country level, many researchers have conducted to investigate the impacts of capital inflows on several aspects of the banking sector Yi (2021) supposed that in terms of capital structure, capital flows can be regarded as the movement of financial assets in both global and domestic markets including bank deposits Rumondor & Bary (2020) analyzed the association between the movements of capital and bank behaviors towards risky projects in Indonesia, showing that the portfolio investment under the flows of capital contribute to raising bank risk-taking attitude This study also indicated that the results can vary in the multi-country level investigation and the behaviors of banks towards risk in credit activities supposes to be more complicated and inconsistent between nations and regions which can lead to systemic risk in banks Moreover, recent research starts to investigate the influence of capital on banking industry risk attitude: Mahdi & Abbes (2018) in Islam, Mara et al (2021) in Indonesia, Zhao and Xu (2021) in China, Following the results of Baskaya et al (2017), the authors empirically investigate the impacts of capital movements and international credit source in Turkey, meanwhile, Dinger & Kaat (2020) is expected to observe the empirical evidence of capital flows influence from the sample of various countries in worldwide, showing that the inflows of capital lower bank risk-taking and the link is reinforced, as same as found in the theoretical regression model of MartinezMiera & Repullo (2017) Several previous research including Bourgain et al (2012) and Cubillas & Gonzalez (2014) also figured out empirical results about the impacts of financial liberalization on the attitude of banks toward risk-taking in several countries or specific regions To our best knowledge, the association among capital inflows and bank-specified activities is analyzed at bank risk-taking behavior and without sufficient demonstration about the impacts of the inflow movement of capital on credit volume fluctuation of banks, meanwhile, the quantity of bank lending is assumed to be affected extensively by capital flows Therefore, we expect to demonstrate the link of the liabilities movements of capital and bank lending in both volume and risk-taking behavior Moreover, given the context of ASEAN, being one of the most prevailed emerging economy regions, it is important to an investigation researching the relationship between capital inflows and bank lending Being situated in a favorable position, ASEAN has a critical location for international trade and especially, economic opportunities Recipient countries in ASEAN have received huge amount of capital, especially the group of ASEAN-6 nations, including Indonesia, Malaysia, Philipines, Singapore, Thailand, and Vietnam However, not many studies have been conducted to test the association between bank lending and capital inflows in this region With the mentioned shortcomings and limited studies, this paper is devoted to investigating the impacts of capital inflows on bank lending in terms of ASEAN-6 countries 1.2 Objectives: In this research, we the examination about the impacts of international capital inflows on bank lending in group of ASEAN-6 countries, including Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam.To be more specific, we aim to explore effects of foreign capital on the dynamics of both the bank loan quantity and credit attitude towards risk in 45 commercial banks from the ASEAN-6 countries from 2005Q1 to 2021Q2 We further decompose the international capital inflows into subcomponents, including the foreign direct investment (FDI), portfolio investment (PI), and other investment (OI) including the movement of notable flows in banking industry due to the distinction between kinds of capital inflows, classified by its trends, characteristics and features (Choi and Furceri, 2019) 1.3 Research subjects and scope of work: Research subjects: Study on the impacts of capital inflows in terms of banks lending in commercial banks of ASEAN-6 countries Research scope - In terms of space: The investigation is conducted in top significant commercial banks in ASEAN including countries: Vietnam, Thailand, Philipines, Malaysia, Indonesia and Singapore - In terms of time: The data is collected from commercial banks and the Governments statistics database in countries during the period of Q1 in 2005 to Q3 in 2021 1.4 Research methodology: Pursuing the purpose of analyzing the impacts of capital inflows on bank lendings, we use panel data regression with bank and country fixed effects to adjust for possibility of unobserved heterogeneity among banks’ indicators and time span because of shared macroeconomic changes To avoid the problem of endogeneity might happen with the dependent variables, we lag all regressors by one period To investigate the impacts of foreign capital on bank lending over different periods and bank sizes, we employ interactive terms between capital inflows and two dummy variables for crisis periods and bank sizes 1.5 Research structure: This paper is organized as follows: - Chapter 1: Literature review and theoretical basis - Chapter 2: Research data and methodology - Chapter 3: Findings and discussion - Chapter 4: Conclusions 1.6 Contribution of the research Our study contributes to the existing documents in several perspectives of approach Firstly, we offer a comprehensive analysis of the impacts of capital inflows in global on bank lending status in the ASEAN region In particular, we provide empirical evidence on the impact of capital inflows on both volumes of loan in banking industry and credit risktaking in terms of being affected by capital inflows While the extant literature focuses on