Bank fund diversity, efficiency operation and risk evidence of commercial banks from vietnam

This paper examines the impact and relationship between fund diversification of banks on their risk and operating efficiency taken into consideration as a conduit.. In contrast, another

INTRODUCTION

The important principle of modern finance theory is the concept of diversification portfolio The riskiness associated with individual assets can be eliminated by creating portfolios (Mishkin et al,

In 2015, the concept of diversification in portfolio management emphasizes that spreading investments across various asset types can significantly mitigate risk Banking institutions can achieve reduced variability by diversifying beyond traditional lending activities, incorporating non-interest income sources such as service charges, trading accounts, fiduciary services, and letters of credit In Vietnam, commercial banks are mandated to diversify their product offerings, asset allocations, and funding sources, or alternatively, to specialize in certain products and services This requirement arises from Vietnam's bank-based economic system, which fosters heightened competition among commercial banks and state-owned banks.

In 2023, the global banking crisis underscored the critical need for operational efficiency and effective capital allocation within banking organizations The scandal involving Saigon Commercial Bank in Vietnam highlighted the importance of efficient operations, particularly during bank runs affecting depositors and lenders Vietnamese banks must enhance their operational efficiency to boost profitability and strengthen their brand image Diversifying funding sources is essential to improve financial security by reducing reliance on a limited number of resources Banks with diversified funding are better equipped to manage risks and maintain trust during financial crises The early phase of the 2022 financial crisis revealed the vulnerabilities of banks with inefficient operations and poorly diversified portfolios, leading to significant withdrawals and bank runs at several small to mid-sized US banks This situation prompted a swift regulatory response to avert a potential global contagion, emphasizing that improved funding diversification can mitigate such risks.

The banking management strategy significantly influences both bank stakeholders and broader economic systems Fund diversification is crucial for enhancing bank operational efficiency, as it contributes to improved performance through economies of scale and scope across various products and funding sources By leveraging customer information and preferences, banks can reduce fixed costs while expanding their business lines Increased business diversity allows banks to gather proprietary information, thereby minimizing the risk of lending to high-risk clients and ultimately fostering greater stability.

Fund diversification enables banks to achieve economies of scope by distributing fixed costs across various products This approach leverages management expertise across different markets, thereby minimizing bankruptcy risk.

Acquiring skills for effective business decision-making in new areas is crucial (Elsas, Hackethal, & Holzhauser, 2010) Risk diversification, as outlined in portfolio theory, highlights that different business segments exhibit varying levels of risk, expected returns, and risk tolerance This approach contributes to more stable revenue streams and reduces default risk, particularly for banks that implement fund diversification strategies.

Fund diversification in banking can exacerbate agency problems between corporate insiders and small shareholders (Laeven & Levine, 2007) It may also dilute the comparative advantages of bank management, forcing managers to operate beyond their areas of expertise (Klein & Saidenberg, 1998) Additionally, this diversification can lead to increased revenue volatility, ultimately affecting profit stability (Berger et al.).

In an increasingly competitive market, banks face exaggerated costs and consequences when attempting to diversify into new sectors, which can impact their stability and efficiency Higher diversification often leads to decreased efficiency due to increased monitoring costs and complexity, resulting in greater risk-taking behavior and reduced stability Additionally, diversification can create agency problems that diminish the market value of banks Expanding into various business lines introduces new risks, including operational and market risks, alongside traditional credit risks This research aims to provide empirical support for the relationship between funding diversification and banking operations in Vietnam.

Banks globally engage in a variety of business activities, including banking, securities, and insurance, often operating under a diversified model that combines these sectors In Vietnam, many banks have adopted the bancassurance model, integrating commercial banking with insurance services, while also participating in brokerage, asset management, corporate finance, and venture capital These non-traditional activities generate significant non-interest revenues, yet the relationship between business diversification and bank risk remains complex, with mixed empirical results While some studies indicate that increased diversification can reduce bank-specific risk and enhance profitability through economies of scale, others suggest that it may elevate systemic risk due to greater exposure to market fluctuations Notably, research has shown that diversification can positively impact bank stability, with efficiency playing a crucial role in this relationship This study contributes to the literature by exploring both the direct and indirect effects of diversification on bank risk, considering both income and funding aspects to provide a comprehensive understanding of banks' diversification strategies.

Vietnam's banking system consists of 57 organizations, including state-owned, joint-stock, foreign-owned, policy, and cooperative banks Between 2010 and 2022, the sector underwent significant restructuring, successfully merging weaker banks with larger ones while maintaining overall financial stability Despite this growth, the banking sector primarily provides short-term capital, with businesses heavily reliant on bank loans for both short- and long-term financing, as the capital market is still developing Recent scandals in Vietnam's bond and stock markets have raised concerns about debt repayment capabilities, exacerbating the risks posed by banks mobilizing short-term funding for long-term needs While much research focuses on developed markets like the US and Europe, Vietnam's unique banking landscape offers valuable insights into bank behavior in emerging markets The dominance of state-owned and large commercial banks shapes market share and customer strategies, leading smaller banks to target specific customer segments Additionally, increasing competition from international banks necessitates diversification as a key risk management strategy Studies indicate that diversification strategies can enhance risk-taking among Vietnamese banks.

As an illustration, Batten and Vo (2016) undertake an investigation into the impact of diversification within the context of Vietnamese commercial banks Moreover, Vuong and Nguyen

In 2021, a thorough analysis was conducted on the impacts of income diversification and state ownership on risk-shifting practices within Vietnamese financial institutions While previous research predominantly focused on the diversity of income sources, the aspect of funding diversification has been relatively overlooked Limited studies, such as Nguyen (2018), have explored the influence of funding diversification alongside income and asset diversification on bank efficiency, while Vo (2020) investigated its effects on bank risk-taking in the context of bond issuance.

Between 2010 and 2022, the banking industry underwent significant fluctuations, prompting the introduction of new decrees and revised laws aimed at enhancing the banking system The government played a crucial role by implementing supportive measures, including easing legal requirements, deferring loan payments, and temporarily extending bad debts during challenging economic times Recently, the adverse effects of COVID-19 and a weakening global economy, compounded by issues in the real estate sector, have led to stagnation in the Vietnamese economy.

Vietnam's interest rates have surpassed the 10-year average, influenced by rising US rates and economic challenges stemming from inflation This has led to a decline in business loan demand, stagnation in domestic and international trade, and limited foreign exchange transactions, resulting in a sharp decrease in national reserves aimed at maintaining a stable exchange rate Consequently, the banking sector's income has been significantly impacted in 2022 and 2023 Banks are facing systemic risks due to exposure to real estate loans and bonds, compounded by the SCB bank run scandal, while their ability to secure funding has diminished, leaving them vulnerable to various risks.

The State Bank's measures to extend and restructure loans are set to significantly influence bad debt levels, while the government's bond repayment extension adds pressure on the banking sector, potentially increasing bad debt and threatening financial stability As the economy begins to recover, maintaining capital stability through diversification is essential for banks However, existing academic literature on the impact of economic downturns on the Vietnamese banking industry is limited This study addresses this gap by analyzing the effects of funding diversity on the profitability and risk-taking of Vietnamese commercial banks It enriches the understanding of funding's influence on bank performance, expands on previous research, and empirically evaluates the relationship between diversification and operational efficiency The findings, supported by robust testing and the FEM-REM approach, provide valuable insights for identifying effective business models and offer recommendations for policymakers and regulators regarding diversification during crisis periods.

This research article is organized into several key sections: Section 2 provides a thorough literature review, while Section 3 details the methodological framework used in the study Section 4 presents a concise summary of the main findings and results Finally, Sections 5 and 6 discuss the conclusions reached and offer recommendations based on the research outcomes.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Diversification, fund diversification

Diversification of bank funds is a crucial strategy for risk management and optimizing returns, rooted in financial theories such as Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) This practice involves allocating capital across various asset classes, sectors, and geographical regions to create a balanced risk-return profile, thereby mitigating the impact of poor performance in any single asset and enhancing overall portfolio efficiency Aligning with the core objectives of banking institutions—preserving client investments and maintaining trust—diversification faces challenges like over-diversification, correlation assumptions, and regulatory constraints Additionally, emerging trends such as the integration of environmental, social, and governance (ESG) factors, artificial intelligence, and lessons from the COVID-19 pandemic are shaping the future of fund diversification Ultimately, fund diversification remains essential for prudent banking practices, enabling banks with a diversified funding structure to reduce dependency on customer deposits while balancing risk and reward in a dynamic financial landscape.

Fund diversification is essential for managing the balance between risk and return in banking organizations, encompassing both income-generating lending activities and non-lending financial services Recent studies highlight that effective fund diversification enhances revenue and reduces operating costs by streamlining free services This strategy not only generates additional income but also mitigates default and unsystematic risks, ultimately improving operational and risk-adjusted profitability By leveraging low or negatively correlated income sources, banks can minimize risk while maximizing profits In recent years, the banking sector has shifted towards non-traditional areas, adapting to competitive dynamics and regulatory changes, while expanding services beyond traditional lending and deposits to include security underwriting, insurance brokerage, and mutual fund services, thereby creating diverse revenue streams.

Under the resource-based theory, particularly in banking organizations, increased fund diversification can significantly enhance performance due to economies of scale and scope, leading to competitive advantages (Geringer et al., 2000) Research by Gilligan et al (1984) indicates that economies of scope allow banks to spread fixed costs across a range of financial services, catering to customer preferences for "one-stop shopping" and thereby increasing net profitability Additionally, banks can improve resource allocation and operational efficiency through effective management and technical capabilities, creating value across different business sectors (Prahalad & Bettis, 1986) Consequently, a diversified strategy may outperform single-service banking organizations, leading to higher revenue (Miller, 2006; Palich et al., 2000) Furthermore, diversified banks can better manage both external and internal financial resources, resulting in greater financial flexibility (Lang & Stulz, 1994).

By nature, banking enterprises use fund diversification to solve uncertain events and unpredicted risks that improve future performance (Boot, 2003; Elsas et al, 2010) According to Elsas et al

In 2010, banking organizations began expanding their operations into various business sectors, which improved efficiency through essential skills and management practices This strategic growth in specific sectors enabled banks to achieve higher comparative levels and increased profitability.

While diversification offers advantages, it also presents significant challenges for companies managing multiple services and products, particularly concerning diversification costs Non-interest income can introduce volatility into revenue and profitability, as noted by Stiroh and Rumble (2006), who argue that increased reliance on non-interest income may reduce revenue cyclicality, contradicting banking management expectations Laeven and Levine (2007) highlight that agency problems can lead to diversification discounts, suggesting that diversified banks often have lower market values compared to specialized institutions Empirical studies, including those by Elsas et al (2010) and Sawada (2013), indicate that while diversification can enhance profitability and market value, it may not significantly mitigate banking risks Kửhler (2015) found that non-interest income increases stability and profitability, but Brunnermeier et al (2019) warned that it could also elevate systemic risk Furthermore, Boot and Schmeits (2000) argue that diversified funding can reduce insolvency risk, although it may exacerbate agency problems among stakeholders Following the 2008-2009 financial crisis, diversification levels in banking declined, yet non-interest income and non-deposit liabilities remain critical to banking performance (Mergaerts et al., 2016).

Risk of bank

Risk assessment is crucial for evaluating a bank's performance, as it reflects the potential loss of economic gains from various banking transactions (Edward, 2021) Prudent banks mitigate the burden of large loans by distributing risk among multiple stakeholders Both traditional and unconventional banking activities are influenced by market power and competitive behavior, which affect their risk exposure The effects of risk management extend beyond individual banks, potentially causing systemic contagion across the financial sector Poor banking practices can destabilize the entire financial system, highlighting the importance of addressing various risk factors, including credit risk, interest rate changes, market volatility, liquidity issues, and operational uncertainties.

Risk fundamentally represents a state of uncertainty with foreseeable outcomes that can lead to potential losses It arises from the ambiguity surrounding deviations from expected results, highlighting the awareness of possible events with associated probabilities, while the exact outcome remains unknown In the financial sector, particularly in banking, risk refers to unfavorable deviations from desired outcomes, indicating the potential for losses as opposed to positive deviations that present opportunities Banking activities inherently involve various uncertainties, which collectively shape a bank's overall risk profile Therefore, the complex interplay of banking operations, transactions, and strategic decisions forms the foundation of the comprehensive risk environment that banks must navigate.

Banking risk is closely linked to financial risks due to the nature of banking operations, making banks the first line of defense against negative economic conditions This risk can be categorized into two types: enduring risks, which lead to permanent changes, and singular risks, triggered by specific events These risks adversely affect banking activities, resulting in asset quality deterioration, reduced profits, and potential losses, ultimately hindering operational efficiency Consequently, banks must prioritize effective risk management strategies to address both internal and external risk sources.

The banking landscape presents a complex array of risks that can significantly impact financial institutions Key risk sources include credit risk, where borrowers may default on loans; market risk, arising from adverse interest rate fluctuations; and liquidity risk, which refers to a bank's struggle to obtain short-term liquidity Additionally, legal risk stems from unexpected regulatory changes, while operational risk encompasses losses from internal inefficiencies and external disruptions Finally, strategic risk highlights the challenges posed by new competitors and innovations in the banking sector Understanding these diverse risks is crucial for effective risk management in banking.

The National Bank of Romania identifies several critical risks that can adversely affect a credit institution's financial stability and reputation These include credit risk, country risk, transfer risk, market risk, price risk, currency risk, interest rate risk, liquidity risk, operational risk, legal risk, and reputational risk, as outlined by Dardac and Vascu.

In 2001, banking risks are categorized into general risks, which include commercial, operational, technical, and internal management dimensions, and bank-specific risks, encompassing financial, counterparty, and signature risks related to customers and countries Systemic risk, a critical aspect of this landscape, intertwines macroeconomic indicators with the banking system's functionality, distinguished by its effects rather than causes This complex risk manifests in various forms and can escalate rapidly, complicating quantification and management efforts Systemic risk is particularly significant within the banking sector, influenced by macroeconomic fluctuations and national dynamics, and poses challenges that can extend beyond borders This research examines the relationship between risk and diversification in Vietnamese banking, aiming to identify strategies to mitigate the risks associated with diversification efforts in financial institutions.

Operation efficiency

The efficiency of commercial banks has been focused on as the important key effect that contributes to the level of success or failure of banking institutions (Barr, Seiford, & Siems, 1994)

In recent years, the global integration of the banking sector has made it essential for financial institutions to implement effective business operations to mitigate risks and avoid potential failures Operating efficiency, defined as the ability to minimize costs while achieving specific objectives through optimal use of human resources, processes, and technology, plays a crucial role in enhancing productivity and service quality Savings from improved operations can be reinvested, providing opportunities for banks to boost profitability and revenue Efficient banks not only maintain stable service levels but also outperform less efficient counterparts By effectively mobilizing deposits, banks can channel funds into areas with high expected social and economic returns Continuous monitoring and evaluation of resources after lending activities further ensure effective utilization Research indicates that an efficient banking system positively influences economic growth by allocating financial resources effectively, thereby enhancing overall productivity.

Banking operations encompass the practices and procedures that ensure accurate and appropriate transaction completion within the banking sector The shareholder approach focuses on operational efficiency, aiming to achieve profitability by maximizing revenue and minimizing costs through various services and products.

In substantiation of this proposition, these economic theories posit that the maximization of profitability coincides with the minimization of costs within the framework of perfect competitio

The performance of banking organizations is significantly influenced by various factors, including regulatory frameworks and monetary policies According to Bikker et al (2008), incorrect incentives and inefficiencies greatly affect banks' profit maximization efforts A bank's global performance is defined by its overall results, which are determined by the correlation between profitability levels and the risks undertaken by the institution (Olteanu).

The performance of banking institutions is assessed through profitability and financial soundness ratios, with risk indicators closely tied to bank profitability Effective risk control is essential, as it directly impacts financial outcomes Therefore, the analysis of banking performance should focus on efficiency, productivity, competitiveness, and profitability, while continuously monitoring indicators that reflect banking activity's effectiveness and risk exposure In international banking, the primary objective is to balance risk and profitability across all products and portfolios Financial statements reveal critical performance metrics that highlight the relationship between risk and profitability, providing insights for both internal stakeholders—such as shareholders and management—and external parties like regulatory bodies and credit rating agencies.

Diversification and risk of banks

Banks with significant diversification share assets and vulnerabilities, creating complex interdependencies that heighten systemic risk This interconnectedness, along with incentives for risk-taking due to the "too big to fail" designation, facilitates the transmission of risks throughout the financial sector Various mechanisms illustrate how diversification impacts systemic risk, as banks with high levels of diversification tend to have similar assets and exposures Since around 2000, policies promoting banking diversification have led to increased mutual exposure in the financial environment, with institutions shifting from retention strategies to origination and distribution, further amplifying their diversification efforts.

An analytical investigation by Allenspach and Monnin (2008) reveals a rising correlation between asset-to-debt ratios, indicating shared exposure among banks Following the turn of the millennium, banks altered their operational strategies, diversifying portfolios to enhance shared exposure, which led to increased similarities in risk profiles across institutions Fund diversification is a key strategy for banks to mitigate risk by spreading capital across various assets, thereby reducing vulnerability to market fluctuations and sector-specific risks (Markowitz, 1952; Lintner, 1965) This approach aligns with Modern Portfolio Theory (MPT), which suggests that a mix of assets with different risk-return characteristics can lower overall portfolio risk without sacrificing returns (Sharpe, 1964) Numerous studies validate that well-diversified portfolios are less prone to significant losses during market downturns (Fama, 1970), making diversification a vital risk management tool for banking stability Additionally, diversified funding often correlates with higher funding liquidity or lower liquidity risk, prompting bank managers to adopt riskier lending strategies when liquidity is abundant (Acharya and Naqvi, 2012; Cheng et al., 2015).

In diversified banking entities, incentive conflicts can lead to financial instability by promoting underpriced credit risk and increasing leverage costs For instance, banks may extend credit to borrowers with weak creditworthiness to secure underwriting roles for their securities Research by Lepetit et al (2008) indicates that a greater focus on fee-based activities in banks is linked to lower lending rates, suggesting that banks may underestimate the default risk of borrowers to enhance their fee-driven operations.

The relationship between fund diversification and risk in banking is complex, presenting challenges such as the risk of over-diversification, which can dilute potential returns and increase management costs Finding the right balance between diversification and concentration is crucial for banks Additionally, the interdependence among banks due to shared assets and exposures leads to increased overlap across banking operations This overlap makes diversified banks more vulnerable to common risk factors, resulting in greater homogeneity within the banking sector As a result, the collective exposure of banks to disruptive shocks is heightened, exacerbating shared vulnerabilities.

Banking diversification is argued to promote inter-bank autonomy (Billio et al., 2014; Kleinow & Moreira, 2016) Giudici, Sarlin, and Spelta (2017) further assert that increased interconnectedness in financial systems becomes more significant with greater asset similarity and shared exposures Consequently, as financial intermediaries maintain diversified portfolios, any financial distress has the potential to disrupt multiple institutions simultaneously.

The effectiveness of diversification is contingent upon the stability of asset correlations over time; however, during periods of market stress, such as the 2008 global financial crisis, these correlations can increase, diminishing diversification benefits (Scherer and Jang, 2004) Furthermore, regulatory constraints significantly influence the relationship between fund diversification and risk in banking, as regulators set limits on risk exposure and permissible asset types, which can restrict diversification strategies (Chen et al., 2018) Consequently, banks must navigate a delicate balance between achieving diversification and adhering to regulatory compliance.

The relationship between bank fund diversification and risk reduction is crucial for the banking industry, as it offers significant advantages such as risk mitigation, improved portfolio efficiency, enhanced client satisfaction, and compliance with regulatory standards Recently, the integration of environmental, social, and governance (ESG) factors into diversification strategies has transformed the landscape, reflecting societal demands for responsible investing and adding an extra layer of risk management (Kajtazi et al., 2021).

Empirical studies on diversification strategies of banks in the US and Europe have primarily focused on non-interest income composition, revealing differing impacts on profit risk profiles For US banks, diversification is associated with reduced profit risk, as shown in research by DeYoung and Roland (2001) and Stiroh (2004) Conversely, European banks experience increased profit risk due to diversification, evidenced by Baele et al (2007) and Chiorazzo (2008) While income diversification enhances profitability for US banks, it also leads to greater income volatility (DeYoung and Rice, 2004) Acharya et al (2006) found that for high-risk Italian banks, diversification diminished profits and increased risky loans, while low-risk banks faced a complex balance between profits and risks Laeven and Levine (2007) corroborated these findings across 13 Western European countries, identifying negative effects of revenue diversification on risk profiles Baele et al (2007) further noted a positive link between higher non-interest income ratios and improved bank performance, although this also raised systemic banking risks In contrast, Rossi et al (2009) indicated that diversification could enhance profitability while reducing bank risks.

Elsas et al (2010) explored the impact of diversification on bank performance using data from developed countries, including Australia, Canada, and the United States, over the period from 1996 to 2008 Their findings revealed that diversifying revenue streams not only improved bank profitability but also provided resilience during the financial crisis of 2007–2008 Similarly, Sanya and Wolfe (2011) examined the effects of risk diversification on bank performance in 11 emerging economies, concluding that revenue diversification reduced bankruptcy risk while enhancing profitability for banks in those regions.

DeYoung and Torna (2013) analyzed the impact of revenue diversification on bank failures during the financial crisis, finding that banks engaged in non-traditional activities had a lower risk of failure if they were financially stable, whereas those in financial distress faced higher failure probabilities Similarly, Delpachitra and Lester (2013) studied nine Australian-listed banks from 2000 to 2009, revealing that revenue diversification and non-interest income negatively affected profitability and did not improve banks' default risk profiles In contrast, Williams and Prather (2010) noted that while non-interest income is riskier than profit income, it offers diversification benefits to shareholders Based on these insights and the theoretical and empirical evidence within the Vietnamese context, the research proposes several hypotheses.

Hypothesis 1 (H1): Funding diversity enhanced Vietnamese banks’ profitability

Hypothesis 2 (H2): Funding diversity increased Vietnamese banks risk-taking activities.

Diversification and efficiency of banks

The relationship between bank fund diversification and operational efficiency is complex and vital to banking institutions Fund diversification serves as a key strategy in managing asset portfolios, aiming to balance risk and return while protecting the bank's financial stability By spreading risks across various assets or sectors, diversification reduces vulnerability to adverse market conditions, thereby enhancing operational efficiency and minimizing the potential for significant losses This risk mitigation is essential for maintaining institutional stability and ensuring smooth daily operations Additionally, diversification supports efficient resource allocation, enabling banks to optimize capital usage and invest in high-return areas within regulatory risk constraints.

The relationship between fund diversification and operating efficiency is complex and requires careful consideration Striking the optimal balance in diversification is crucial; too much diversification can weaken investment returns and elevate transaction and management costs, while too little can leave banks vulnerable to significant risks.

Striking a balance between maximizing risk-adjusted returns and maintaining operational efficiency is crucial for banks to offer competitive financial products Diversifying assets across various classes, sectors, and regions not only aids in risk management but also enhances revenue sources, increasing operating income This diversified approach reduces dependence on a single income source, making banks more resilient to market fluctuations Furthermore, incorporating diverse asset classes allows for optimized capital allocation, directing resources towards higher growth potential while ensuring compliance with regulatory standards.

The evolving relationship between fund diversification and operational efficiency is increasingly influenced by emerging financial trends, particularly the integration of environmental, social, and governance (ESG) factors into banking strategies According to Kajtazi et al (2021), this alignment with societal expectations not only supports responsible banking but also enhances operational efficiency by reducing reputational risks and attracting ethically-minded clients Additionally, advancements in technology, such as artificial intelligence and machine learning, further optimize diversification strategies, improving banks' operational effectiveness (Bollen and Tang, 2010) However, while maintaining diversified funding sources can lead to higher costs and potential inefficiencies, other research indicates that funding diversification is crucial for bank profitability, as funding certainty is vital for a commercial bank's success.

While extensive research has examined the relationship between diversification and factors like market value, profitability, and risk in banks, fewer studies have focused on its impact on bank efficiency It is generally expected that integrating related activities can lower operational costs and improve resource allocation flexibility, leading to efficiency gains However, various factors may complicate the expected efficiency improvements in banks with higher activity diversity.

The diversification of business lines and clientele can increase monitoring costs for banks without necessarily enhancing the overall output of financial services, potentially reducing cost efficiency Risk-averse bankers may resort to intensive monitoring to maintain a less risky portfolio, which can further diminish both cost and profit efficiency Additionally, increased business diversity may complicate management, requiring significant investments in human capital and advanced expertise Exploring new or unrelated business areas might weaken banks' core competencies, adversely affecting overall efficiency Research on the relationship between bank fund diversification and efficiency is complex and inconclusive; for instance, Vander Vennet (2002) found that European financial conglomerates generally display higher cost efficiency than specialized banks, but show limited evidence of diversification positively impacting profit efficiency.

Research shows that diversified bank holding companies often enjoy lower debt costs, supporting findings by Lozano-Vivas and Pasiouras (2010) that link cost efficiency to non-traditional banking activities However, many studies challenge this view, with Ferrier et al (1993) indicating that banks with diverse product lines may experience higher cost inefficiency, suggesting diseconomies of diversification In China, Berger et al (2010b) found that more diversified banks incur higher operating costs, while Rossi et al (2009) noted a negative effect of diversification on cost efficiency, though it positively influences profit efficiency Curi et al (2015) concluded that foreign banks with focused business models exhibit greater efficiency Overall, the relationship between bank diversification and efficiency is complex, reflecting a range of research outcomes that underscore the various factors affecting banks' operational performance.

Diversifying funding sources is crucial for enhancing banks' profitability and cost efficiency, especially during financial crises (Abbas et al., 2021; Vo, 2020) This diversification not only stabilizes a bank's capital position but also boosts its profitability by reducing reliance on a few primary funding sources Studies indicate that capital uncertainty can lead to decreased loan confidence, further impacting profitability during crises (Ritz and Walther, 2015) Research conducted on ASEAN commercial banks from 2007 to 2014 supports the notion that improved funding diversity correlates with higher profitability and cost efficiency (Nguyen, 2018) However, it is essential to note that multiple funding avenues can increase operational costs and potentially reduce profits under certain conditions (Vo, 2020) For example, reliance on wholesale funding can pose risks, as wholesale financiers may withdraw support based on uncertain assessments of bank asset quality, leading to reduced profitability (Huang and Ratnovski, 2008).

The relationship between funding diversity and bank risk remains debated, with some studies suggesting that increased funding diversity reduces banks' risk and enhances stability, especially in crises (Abbas and Ali, 2021) Their analysis of US commercial banks from 2002 to 2019 highlights the positive impact of asset, income, and funding diversification on risk and stability Conversely, other research indicates that greater funding diversity may lead to higher risk levels, as banks with diversified sources may experience lower liquidity risk, prompting managers to take on greater risks or engage in risky lending practices (Cheng et al., 2015; V Acharya & Naqvi, 2012) Vo (2020) also notes that Vietnamese commercial banks exhibit increased risk-taking behaviors when they have access to diverse funding sources.

Bank diversification can negatively impact performance due to increased agency problems between corporate insiders and small shareholders, which may harm the firm's market valuation Laeven and Levine (2007) highlight that greater diversification complicates the creation of effective managerial incentive contracts, making it difficult to align the interests of insiders and outsiders This issue is exacerbated when bank insiders broaden their business activities to gain additional private benefits Jensen and Meckling (1976) argue that the effects of diversification on firm performance and market valuation are secondary; insiders will pursue diversification as long as the marginal private benefits outweigh the losses from changes in performance and valuation In contrast to Iskandar-Datta and McLaughlin's (2007) view on leveraging managerial skills across sectors, Klein and Saidenberg (1998) suggest that diversification may dilute managers' comparative advantages, leading them to operate beyond their areas of expertise.

Fund diversification is a strategic approach utilized by banks to manage uncertainty and improve future performance Technological advancements and deregulation are reshaping the banking industry, highlighting the importance of early diversification into new business areas This proactive strategy allows banks to gain essential expertise, enabling them to make informed decisions and leverage emerging opportunities for increased profits Ultimately, diversification is viewed as an investment in skill development, empowering banks to enhance shareholder value by capitalizing on future growth prospects.

Banks may engage in activities outside their expertise, leading to reduced performance (Stiroh, 2004b) Acharya et al (2006) highlight the challenges of effective monitoring when banks diversify into unfamiliar areas, while Shaban et al (2014) indicate that this diversification could increase risks due to difficulties in managing new client bases The debate over the benefits and costs of diversification remains unresolved, as evidenced by Elsas et al (2010), who find that diversification can enhance profitability and market value Sawada (2013) reports similar findings in Japan, noting a positive link between revenue diversification and market value without significantly reducing bank risk Kửhler (2015) shows that banks benefit from non-interest income, although non-deposit funding can negatively impact stability Guerry and Wallmeier (2017) observe that "diversification discounts" vary over time, particularly after the global financial crisis Conversely, Chen et al (2017) find that non-interest income may harm bank stability, while Brunnermeier et al (2019) note that systemic risk increases with higher non-interest income shares Other studies, like De Young and Torna (2013), reveal mixed outcomes, with some fee-based activities reducing the risk of bank failure, while others exacerbate it Hryckiewicz and Kozłowski (2017) suggest that non-traditional funding can intensify crisis severity without extending its duration Overall, the complex relationship between bank diversification, performance, and risk underscores the careful balance banks must maintain.

From the above diverse theoretical and experimental evidence in the Vietnam context, reseacher propose the following hypotheses:

Hypothesis 3 (H3): Funding diversity enhanced higher level of banking operating efficency Hypothesis 4 (H4): Funding diversity had negative impact to banking operating effiency.

Efficiency and risk of banks

The relationship between banks' efficiency and risk profiles has attracted significant scholarly interest, enhancing our understanding of their complex dynamics Research has revealed how operational effectiveness impacts risk exposure, with early studies, such as those by Berger and De Young (1997), highlighting the critical role of efficiency in determining banks' risk profiles These studies, based on the "bad management" hypothesis, suggest that low efficiency reflects poor senior management practices, leading to ineffective credit scoring, inadequate collateral appraisal, and difficulties in borrower monitoring, ultimately increasing risk levels in less efficient banks.

(2011) advance the argument that reduced efficiency levels can exacerbate agency problems, compelling banks to potentially compromise lending standards or scale back client monitoring in a quest for higher returns

Numerous studies highlight the intricate relationship between bank efficiency and stability, with a prevailing focus on the positive effects of efficiency on bank resilience Research by Barr et al (1999) indicates a negative correlation between non-performing loan ratios and efficiency in U.S banks, while Eisenbeis et al (1999), Shamsuddin and Xiang (2012), and Fu et al (2014) demonstrate a positive link between shareholder value and improved efficiency across banks in the U.S., Australia, and the Asia-Pacific Additionally, Luo et al (2016) reveal that increased financial openness can lead to decreased efficiency, heightening bank fragility Overall, the literature emphasizes the crucial role of efficiency in influencing banks' risk profiles and stability, prompting researchers to propose relevant hypotheses within the context of Vietnam.

Hypothesis 5 (H5): Banking operating efficency lowered or remained the risk taking of banking organization

Hypothesis 6 (H6): Banking operating efficency increased the risk taking of banking organization in Vietnam.

DATA AND EMPIRICAL METHODOLOGY

Data

This study analyzed annual data from 37 Vietnamese commercial banks spanning 2010 to 2022, utilizing publicly accessible data sources As of the end of 2022, the total authorized capital of Vietnamese commercial banks reached VND 743 trillion, with the selected banks representing 95% of the banking system's total capital This sample is significant for understanding the entire banking sector The research aimed to fill the time gap identified in Hieu's 2020 study and to evaluate the impact of diversified funding sources on the efficiency and risk management of Vietnamese banks Data was collected from post-audit consolidated financial statements, focusing on banks that provided comprehensive financial reports, including balance sheets and income statements Additional data sources included Fiin Pro, the State Bank of Vietnam, bank websites, the General Statistics Office of Vietnam, and the Ministry of Finance After data collection, the information was imported into Excel for thorough review and cleaning, correcting errors and ensuring data integrity The cleaned data was then analyzed using Stata 13 software to conduct the necessary calculations and process the findings.

Model specification

The panel estimation technique is suitable for this research due to the nature of the data, as it effectively accounts for the heterogeneity among individual banks (Kwashie et al., 2022) The specified equations are as follows:

In the analysis of banking performance and risk assessment, econometric models are utilized to explore the relationship between essential financial metrics and bank outcomes The performance and fund diversity model incorporates key ratios such as ROA (return on assets) and ROE (return on equity), with coefficients β0 through β7 representing independent variables like NIM (net interest margin), LIQDIV (funding diversity indicator), SIZE (bank size), LTA (loan to asset), ETA (equity to asset), NPL (non-performing loans), and LDR (loan-to-deposit ratio), while ε denotes the error term Additionally, the risk assessment model, represented by the Z-Score, evaluates bank risk, with ε accounting for unexplained variations, and indices i and t indicating the bank's position in a specific year, while ui captures individual-specific effects over time These models collectively provide a robust framework for assessing both bank performance and risk through various financial indicators and their corresponding coefficients.

Variable measurements

Bank performance, from a shareholder perspective, relies on maximizing revenue while minimizing costs Economic theories suggest that profit maximization and cost minimization are aligned in competitive markets, but practical factors, such as regulatory changes, can disrupt this balance Misaligned incentives and operational inefficiencies contribute to deviations from profit maximization, as noted by Bikker and Bos (2008) Evaluating a bank's economic efficiency involves comparing its performance to that of a best-practice bank, with efficiency defined as the ability to optimize costs or profits (Aigner et al., 1977) Profit efficiency is assessed by comparing a bank's profits to those of an optimal counterpart (Berger and Mester, 1997) Various performance metrics, utilizing accounting and market data, assess a bank's financial health and managerial effectiveness (Jianu et al., 2017), with profitability serving as a key performance indicator (De Andres and Vallelado, 2008; Liang et al., 2013) The primary methodologies for evaluating bank performance include returns on assets (ROA) and returns on equity (ROE), while Tobin's Q is another approach (Laeven and Levine, 2007) This study prioritizes ROA for assessing bank performance and extracting surplus value, focusing on either ROA or ROE rather than broader indicators like cost efficiency and asset quality, which include the cost-to-income ratio (CTI) and loan loss reserves to gross loans (LLR) (Beck et al., 2013; Vennet, 2002) Furthermore, the pursuit of profit increases banks' exposure to risks, making diversification a crucial risk mitigation strategy (Chiorazzo et al., 2008; Stiroh, 2004a, 2004b).

The funding of a commercial bank encompasses the monetary value generated or mobilized for lending, investing, and other business activities In Vietnam, the capital sources of banks consist of liabilities and shareholders’ equity, which include amounts due to the Government and State Banks, deposits and borrowings from other credit institutions, customer deposits, derivative financial instruments, funds for finance and entrusted investments, issued valuable papers, and various other liabilities.

This article discusses the measurement of bank funding diversity, referencing the methodologies established by Nguyen (2018) and Vo (2020) The bank funding diversity index, known as FDIV, is quantified on a scale from 0 to 1, indicating the breadth of a bank's financing sources A higher LIQDIV score signifies a greater diversity in funding options available to the bank.

The bank's total equity (EQU) is influenced by various factors, including government and central bank debt (GOV), interbank deposits (IBD), total customer deposits (CD), and derivative instruments (DER).

The LIQDIV indicator measures funding diversity, ranging from zero to one, where higher values signify greater diversity in funding sources In this context, FF represents financial debts, VP denotes funding for investment mandates, OTHER encompasses additional funding sources, and FUND indicates the bank's total funding.

Researchers utilize two key metrics to assess bank risk: the Non-Performing Loan (NPL) ratio and the Z-score The Z-score, developed by Demirgüç-Kunt and Huizinga (2010), Kührler (2015), and Laeven and Levine (2009), serves as an inverse indicator of a bank's likelihood of failure by integrating profitability, leverage, and return volatility Higher Z-scores indicate greater bank stability and reduced risk (Hsieh et al., 2013; Kick and von Westernhagen, 2009) The Z-score is preferred over the NPL ratio for risk assessment because it goes beyond credit risk Unlike NPLs, which are historically backward-looking and procyclical (Bikker and Metzemakers, 2005; Laeven and Majnoni, 2003), the Z-score reflects changes in bank risk through its variance component (Delis et al., 2011) Its ability to measure various aspects of risk, as highlighted by Agoraki et al (2011), reinforces the Z-score's comprehensive approach to risk evaluation.

This study's risk assessment framework is grounded in established bankruptcy risk measurement concepts from Roy (1952), Boyd and Runkle (1993), and Lepetit and Strobel (2015), alongside bank diversification theories from Mercieca et al (2007), Chiorazzo et al (2008), and Lee et al (2014) Roy's Z-score, a key predictor of a bank's bankruptcy likelihood, serves as a primary index for bank risk estimation, with a higher Z-score indicating a lower bankruptcy probability, as noted by Lepetit and Strobel (2015) The calculation of the Z-score is detailed in the accompanying formula.

Demsetz and Strahan (1997) argue that there is a positive relationship between diversification and the size of bank assets Specifically, as the total amount of bank deposits increases, banks are more likely to offer larger loan amounts to their customers To measure bank size, the natural logarithm of total assets is used as an indicator.

The relationship between bank size and performance is complex and nonlinear, as highlighted by Curi et al (2015) and Berger et al (2010) While larger banks benefit from economies of scale, leading to lower costs and increased profitability (McAllister & McManus, 1993; Goddard et al., 2004), Vallascas and Keasey (2012) argue that they may also engage in riskier ventures, potentially resulting in lower efficiency compared to smaller banks This ongoing debate emphasizes the need for further research into how bank size influences performance and behavior.

"e," where "e" is the mathematical constant approximately equal to 2.71828

3.3.5 Capitalization ratio, measured as the ratio of equity to total assets (ETA)

The financial leverage ratio of a bank indicates its level of risk, with higher leverage correlating to increased risk levels Recent studies, including those by Sanya and Wolfe (2011) and Chiorazzo et al (2008), emphasize this variable's importance Well-capitalized banks generally face lower risk exposure, although this can lead to diminished profit generation, as noted by Hughes and Mester (1998) There exists an inverse relationship between capitalization and profits, suggesting that greater capitalization can reduce bankruptcy risks, particularly when the capital asset ratio is low This relationship indicates a positive correlation between the capital asset ratio and overall bank performance, as highlighted by Berger (1995) Empirical research by Demirgỹỗ-Kunt and Huizinga (1999) and Goddard et al (2004) reinforces the idea that effective banking practices necessitate a significant equity level relative to total assets, thereby minimizing bankruptcy risks and associated costs.

In 2013, research highlighted the relationship between investment capital risks and bank risks, indicating that banks can enhance their capital positions by taking on greater risks in income-generating asset portfolios and engaging in off-balance sheet activities This suggests that adopting a more aggressive diversification strategy may help banks increase their capital reserves.

3.3.6 Ratio of loans to total assets (LTA)

The Loans to Assets (LTA) ratio is a crucial metric in the banking sector, indicating credit risk management, asset quality, and financial stability This ratio, which measures the proportion of total loans to total assets, is vital for evaluating a bank's health and risk profile It provides insights into a bank's capacity to manage credit risk, maintain liquidity, and ensure asset quality Research by Sanya and Wolfe (2011), Chiorazzo et al (2008), and Stiroh highlights how this ratio reflects the impact of a bank's loan strategy on its performance and risk mitigation capabilities.

An increase in the ratio of total loans to mobilized capital indicates a rise in credit activities, which can adversely affect profitability and elevate credit risk Consequently, there is a positive correlation between this ratio and the risk levels faced by banks.

3.3.7 Ratio of Non-performing loan (NPL)

The Non-Performing Loans (NPL) ratio is a vital metric in the banking sector, reflecting asset quality, credit risk, and financial stability It is commonly calculated by comparing non-performing loans to total outstanding loans, providing insight into the health of financial institutions and their lending practices When banks face significant losses, they must increase their capital to meet regulatory requirements and reduce bankruptcy risk This relationship between capital and risk management is crucial for minimizing potential bankruptcy, which is linked to credit risk Research by Aggarwal and Jacques (2001) suggests that declining asset quality leads to increased risk exposure, establishing a positive correlation between credit risk and bankruptcy susceptibility, ultimately affecting projected bank earnings Moreover, loans with a high NPL ratio adversely impact asset quality, resulting in a rapid increase in the bank's overall risk profile, as noted by González-Hermosillo (1999).

Mercieca et al (2007); Chiorazzo et al (2008); Lee et al (2014)

Aggarwal and Jacques (2001); González- Hermosillo (1999)

Sanya and Wolfe (2011); Chiorazzo et al (2008)

Demirgỹỗ-Kunt and Huizinga (1999); Goddard et al (2004); Porter and Chiou (2013)

(Demirgỹỗ-Kunt and Huizinga 2010); (Norden and Weber 2010)

Curi et al (2015); and Berger et al (2010) Vallascas and Keasey

Estimation strategy

This paper utilizes the Hausman specification test to compare the fixed effect model and the random effect model in estimating equations The null hypothesis suggests that the random effect model is suitable, while the alternative hypothesis indicates the fixed effect model is more appropriate If the null hypothesis is rejected, indicating a significant Hausman test result, the fixed effect estimator is deemed appropriate.

In contemporary banking and financial economics research, advanced econometric methodologies, particularly the Fixed Effects Model (FEM) and the Random Effects Model (REM), are essential for enhancing analytical rigor and understanding complex relationships within financial datasets These models serve as powerful tools for analyzing intricate dynamics in panel data, effectively addressing issues related to unobserved heterogeneity and time-invariant characteristics The integration of FEM and REM into empirical studies reflects a commitment to methodological refinement and insightful inquiry.

The Fixed Effects Model (FEM) provides a customized method for analyzing how variables change within specific entities over time by removing individual-specific averages from the data This approach effectively captures unobservable effects unique to each entity, enhancing our understanding of the temporal dynamics influencing financial phenomena In contrast, the Random Effects Model (REM) treats these unobserved individual-specific effects as random variables, offering insights into average effects across different entities The REM is especially useful when the research goal is to gain a broader perspective that goes beyond individual variations.

The reliability of research findings hinges on adherence to key econometric assumptions, particularly the absence of heteroscedasticity and autocorrelation This study employs the Modified Wald test to examine heteroscedasticity, where the null hypothesis asserts equal variances among errors, indicating homoscedasticity Accepting this null hypothesis confirms the constancy of error variance, thereby validating the unbiasedness of regression coefficients In time series data, autocorrelation occurs when a variable correlates with its lagged version, potentially undermining the reliability of regression coefficients and hypothesis testing The Wooldridge test addresses this by positing the null hypothesis of no autocorrelation Accepting this hypothesis protects against autocorrelation bias, enhancing the integrity of the model's inferences, aligning with foundational research such as Wooldridge (2010) that emphasizes the importance of addressing autocorrelation in econometric analysis.

EMPIRICAL RESULTS AND DISCUSSIONS

Descriptive statistic

This study evaluates the impact of funding diversification on the performance of Vietnamese commercial banks from 2012 to 2022, analyzing 37 banks categorized by size (large-cap, mid-cap, and small-cap) Key dependent variables include bank income, measured by ROA and ROE, and bank risk, represented by ZSCORE Control variables encompass bank operating proxies such as net interest margin (NIM), liquidity coverage ratio (LIQ), net profit loss (NPL), and characteristics like bank size (SIZE) and capital structure (LTA, ETA) The primary explanatory variable is funding diversification (LIQDIV) A panel data regression approach, utilizing both random effects and fixed effects models, is employed to address the research questions, starting with a correlation analysis to identify potential autocorrelation and multidimensional limitations of the independent variables in the regression models.

Table 2: The descriptive statistics of the variables for large-cap commercial banks

Variable Obs Mean Std.dev Min Max

The analysis of Vietnamese commercial banks in the large-cap sector reveals a mean Return on Assets (ROA) of 0.105931, with values ranging from 0.003 to 0.0358 and a standard deviation of 0.0071748 Additionally, the Return on Equity (ROE) has a mean of 0.1382777, with a range of 0.003 to 0.2879 and a standard deviation of 0.07383 The low standard deviation of the z-score at 3.981791 indicates that these banks operate safely under the regulations of the State Bank of Vietnam Notably, large-cap banks such as Vietcombank, Viettinbank, and BIDV are predominantly state-owned, facing less risk compared to joint-stock banks due to their higher capital reserves and investments in lower-risk assets.

2012 - 2022, fluctuations in the z-score may increase sharply due to unusual circumstances such as the Covid epidemic occurring between 2019 – 2022

Table 3: The descriptive statistics of the variables for mid-cap commercial banks

Obs Mean Std.dev Min Max

Table 4: The descriptive statistics of the variables for small-cap commercial banks

Obs Mean Std.dev Min Max

Tables 3 and 4 illustrate the financing variations for mid-cap and small-cap banks, with 169 and 182 observations respectively The Z-score mean for mid-cap banks is significantly lower than that of small-cap banks, indicating that small-cap banks face 15 times higher risk Both sectors tend to be more risk-oriented, often taking on additional risks to enhance profits compared to large-cap banks In Vietnam, around 71% of financing for commercial banks comes from customer deposits, a figure that has declined since the Covid-19 pandemic Over the past decade, bank profits have fluctuated, particularly with the growth of joint stock commercial banks Key performance indicators such as ROA, ROE, credit quality, and bad debt have shown positive trends following the State Bank of Vietnam's 0 dong policy aimed at improving small-cap bank efficiency Additionally, the LIQDIV variable's mean increases inversely with bank capitalization, as larger banks tend to have less diverse capital sources due to their larger corporate and individual customer bases, coupled with lower risk levels compared to their smaller counterparts.

Table 5: Correlation analysis - the pairwise correlation matrix for variables

V NIM LIQ NPL LTA ETA SIZE

Before conducting fixed effect model (FEM) and random effect model (REM) regression analyses, the researcher carried out a correlation analysis and created a table to identify potential autocorrelation patterns and explore multidimensional issues related to the independent variables that might affect the regression model The results shown in Table 5 indicate no evidence of autocorrelation, allowing for the continuation to the next stages of testing.

Table 6: VIF test for large-cap, mid-cap and small-cap banks

Large-cap Mid-cap Small-cap

Variable VIF 1/VIF VIF 1/VIF VIF 1/VIF

(Source: Author, 2023) All the figures are smaller than 10, therefore, there is no multicollinearity.

Impact on the efficiency

Large-cap Mid-cap Small-cap

ROA ROE ROA ROE ROA ROE

The presence of heteroskedasticity is indicated by p-values less than 0.05, except for the return on assets (ROA) model Consequently, the analysis will transition from Ordinary Least Squares (OLS) to Fixed Effects Model (FEM) and Random Effects Model (REM) Both FEM and REM will be applied, followed by the Hausman test to determine the most suitable method for each model.

This study employs regression models for panel data, utilizing fixed effects models for mid-cap and small-cap banks, and random effects models for large-cap banks, to analyze the factors influencing bank profitability and risk.

Recent studies indicate a positive correlation between variables such as LIQDIV, NIM, LIQ, ETA, and SIZE with the profitability of commercial banks, while HHI, NPL, LTA, and cons negatively impact ROA and ROE This suggests a significant relationship between a bank’s profitability and funding diversification, highlighting its role in enhancing scale, stability, and cost-effectiveness of capital mobilization, as noted by Nguyen et al (2022) With over 80% of commercial banks' capital derived from mobilized sources, diversifying these capital sources is crucial in banking strategy Additionally, findings reveal that an increase in net interest margin positively affects ROA and ROE, correlating with higher net income and profit before tax, consistent with Angbazo et al (1997) This underscores that net interest income is vital for banks' revenue growth and should be sustained over the long term, demonstrating that Vietnamese commercial banks can effectively generate profits using their total assets and equity.

The size of Vietnamese commercial banks positively correlates with their profitability, indicating that these banks are leveraging their capital to boost operational efficiency To enhance their performance, they should develop strategies to expand their network of branches and transaction offices across various provinces and cities, as well as explore opportunities in promising international markets However, this expansion must be accompanied by robust risk management practices and improvements in the quality of human resources within the banks.

The analysis reveals a positive correlation between funding diversification (LIQDIV) and profitability, as indicated by the coefficients of ROA (0.0005515) and ROE (0.02257155) for large-cap banks Notably, the ROA coefficient associated with LIQDIV increases from 0.005515 to 0.0058631 and 0.0330681 as bank capitalization decreases, suggesting that greater capital diversification enhances the profitability ratio relative to total bank assets This finding aligns with Booth et al (1992), who assert that diversification contributes to incremental returns, with each asset's contribution surpassing its compound return Furthermore, the co-variation ratio of LIQDIV with ROE is highest in the mid-cap banking sector at 0.1422901, outperforming large-cap (0.0257155) and small-cap (0.0330681) banks, indicating that mid-cap banks utilize shareholder capital more efficiently to generate profits.

The return on assets (ROA) and return on equity (ROE) of commercial banks are positively correlated with the equity to asset ratio, highlighting the significant role of equity capacity in enhancing bank profitability Research by Pasiouras and Kosmidou (2007), Caporale et al (2012), and Mirzaei et al (2013) indicates that banks with substantial equity capital typically exhibit superior risk management and operational performance Moreover, a strong equity base not only bolsters the reputation of these banks but also lowers capital costs and improves their ability to attract funding in the market.

Table 8 : Regression results with fixed effects model Large- cap banking organizations

Table 9: Regression results with fixed effects model - Mid– cap banking organizations

Table 10: Regression results with fixed effects model - Small-cap banking organizations

In this hypothesis test, the significance level is established at 5% The p-value for the regression model analyzing ROA and ROE with LIQDIV for small-cap banks is less than 0.05, indicating statistical significance Conversely, the p-value for the same regression model in large-cap banks is also less than 0.05, but it reveals a lack of significance For mid-cap banks, significance is found only in the ROE results Consequently, we can reject the null hypothesis solely for the small-cap banking sector, allowing us to depend on the regression findings for decision-making in this specific group of commercial banks.

Banks with higher funding diversification, indicated by the LIQDIV variable, tend to enjoy greater funding certainty, which can enhance profitability However, in the post-Covid period, many Vietnamese commercial banks struggle with capital mobilization diversification due to elevated interest rates, leading to challenges in maintaining financial capacity The reliance on savings deposits, which have higher mobilization costs and sensitivity to interest rates compared to demand deposits, further undermines the stability and sustainability of capital efficiency While diversified funding can present risks of reduced profits due to difficulties in recovering principal and interest from customers, uncontrolled risks may jeopardize banking operations and negatively impact the broader economy Notably, banks with strong capital positions experience lower bankruptcy risks and provisioning costs, countering the notion that diverse capital sources always lead to increased profitability without heightened risk These insights highlight the unique behaviors of banks in emerging markets, particularly in Vietnam.

From 2012 to 2022, the bank's risk control activities remained stable, leading to a decrease in overall risk To ensure continued growth in a safe and sustainable manner, bank managers must address challenges related to capital management and mobilization Cooperation between the State Bank of Vietnam (SBV) and bank leaders is essential for developing effective solutions and managing bank equity, involving both state management agencies and commercial banks.

4.3.Impacts of bank fund diversification on the risk of commercial bank

Large-cap Mid-cap Small-cap

The analysis indicates the presence of heteroskedasticity, as all p-values are below 0.05, except for the ROA model Consequently, the analysis will transition from an OLS model to a Fixed Effects Model (FEM) and a Random Effects Model (REM) Both FEM and REM will be applied to each model, followed by a Hausman test to determine the most suitable method for each case.

This section mirrors the analysis in Section 4.2, utilizing both the Fixed Effect Model (FEM) and Random Effect Model (REM) for panel data to evaluate the influence of funding diversification on the risk within the Vietnamese commercial banking system The findings from the FEM and REM analyses are presented in Tables x.

Table 12: Fixed Effect Model and Random Effect Model – impacts of funding diversification on bank risk

Large-cap (REM) Mid-cap (FEM) Small-cap (FEM)

The analysis indicates that fund diversification negatively impacts the operating risk of banks, with p-values of 0.09, 0.13, and 0.03, all below the 0.05 threshold, leading to the rejection of H0 and acceptance of H1 Specifically, funding diversification shows a positive correlation in mid-cap and small-cap banks, while exhibiting a negative correlation in large-cap banks According to Nguyen (2018), when managed effectively, funding diversification is generally viewed as a strategy that reduces risk for banks However, if not implemented correctly, it may introduce new challenges, including increased funding costs, mismatches between funding and assets, and heightened credit risk.

Diversifying investments allows banks to reduce asset concentration in any single category or sector, effectively mitigating risks tied to specific asset classes, as noted by Curi et al (2015) Additionally, funding diversification enhances liquidity risk management, providing banks with the flexibility to sell or utilize assets during critical times This adaptability is especially vital during financial crises or economic downturns, where liquidity concerns become paramount.

Banks that overly depend on customer deposits face significant risks, including liquidity, interest rate, and market risks A notable example is Saigon Commercial Bank, which declared bankruptcy in 2022 following a severe bank run that strained its liquidity and threatened a crisis The inherent instability of relying on customer deposits stems from the common practice of banks mobilizing short-term funds while lending long-term, resulting in a mismatch that can lead to funding challenges during economic downturns or interest rate fluctuations To mitigate these risks, it is crucial for banks to explore more sustainable funding sources.

Banks that depend significantly on customer deposits often provide a range of deposit products with fixed or variable interest rates, which exposes them to interest rate risk An increase in interest rates can lead to higher interest expenses on deposits, potentially narrowing the bank's net interest margin Conversely, a decline in interest rates may hinder the bank's ability to offer attractive rates, making it challenging to attract and retain depositors.

RECOMMENDATION

Capital mobilization is crucial for the stability and growth of commercial banks in Vietnam, especially in a competitive landscape where product similarities exist To enhance operational efficiency and mitigate risks, banks must diversify their capital sources by tapping into various channels This diversification strategy should be meticulously planned, focusing on the bank's current capital structure and identifying vulnerabilities to economic downturns A tailored roadmap for diversification, aligned with the bank's risk appetite and financial objectives, is essential, particularly in the post-Covid environment where over-reliance on specific industries, like Real Estate, has proven detrimental Establishing a dedicated research team to analyze existing capital sources and assess deposit concentration will aid in setting clear diversification goals Ultimately, developing a strategic plan with milestones that considers market conditions and regulatory requirements is vital for effective implementation.

To enhance capital mobilization, it is essential for the government and the State Bank of Vietnam (SBV) to implement policies that improve customer attraction strategies for commercial banks Additionally, management boards of these banks must establish clear risk management standards to effectively diversify and mobilize their capital sources.

Effective capital source diversification is crucial for success, necessitating comprehensive capital management rules that address various risks, including credit, liquidity, market, and operational risks Banks must enhance their credit and liquidity assessment processes and develop robust risk assessment models for capital mobilization products A thorough credit risk evaluation for each customer is essential to ensure asset quality aligns with diversification criteria Additionally, banks should establish credit safety rules that meet liquidity demands, ensuring resilience against economic fluctuations and having contingency financing plans Operational risk management must also be strengthened through internal audits and incident response protocols Compliance with Vietnamese laws and regulations is vital, requiring each bank's legal department to create standards and monitor adherence across all branches The State Bank of Vietnam (SBV) plays a key role in mitigating risks for commercial banks by providing timely support policies and ensuring stable interest rates and liquidity Recent measures, such as extending lending terms, enhance liquidity, while long-term strategies may involve SOCBs issuing bonds and reducing state ownership to attract domestic and foreign investments, thereby improving financial capacity and access to advanced management practices.

Commercial banks must collaborate closely with regulatory agencies to diversify their capital sources effectively Bank leaders should engage proactively with the State Bank of Vietnam (SBV) and maintain open lines of communication with regulators to understand regulations, assess potential changes, and develop optimal investment funding strategies Additionally, regulators play a crucial role in supporting banks by fostering effective communication, facilitating information exchange forums, promoting funding diversification, and keeping banks informed about evolving regulatory standards and best practices.

Commercial banks must consistently assess the effectiveness of their funding diversification strategies to enhance performance This long-term process is influenced by various internal and external factors, which can lead to unexpected outcomes To mitigate potential risks and identify new challenges, banks should implement robust monitoring mechanisms based on key performance indicators (KPIs) and specific risk indicators related to capital diversification Additionally, the ability to adapt and respond flexibly to changing circumstances is crucial for banks to effectively manage emerging risks in the future.

This research employs quantitative analysis to evaluate Fixed Effects Model (FEM) and Random Effects Model (REM), revealing that revenue diversification among listed banks leads to varied outcomes in risk mitigation While interest income remains the primary growth driver, its increase correlates with higher profitability and systematic risk The benefits of revenue diversification are tempered by rising non-interest activities, which also serve as a risk-mitigating factor The banking sector faces challenges in developing a balanced profit conversion model, particularly under the pressures of Basel II and III compliance, prompting banks to rethink their business strategies and revenue streams Many banks are shifting focus from credit promotion to service development, yet significant short-term revenue growth from this transition remains elusive Even major retail banks are experiencing declines in service revenue, highlighting the need for Vietnam's commercial banking system to enhance non-credit services, especially in e-banking, to meet the demands of digital banking trends Improved bank liquidity is linked to increased profitability, and banks are implementing strategies such as interest rate adjustments, product diversification, flexible deposit terms, and enhanced service quality to mitigate risks and ensure stability.

CONCLUSION AND IMPLICATIONS

This thesis investigates the complex relationship between funding diversification and its impact on operating efficiency and risk in the banking sector It explores the different aspects of funding diversification, analyzes its implications, and examines the intricate factors that shape a bank's operational environment.

The research began with a thorough literature review, highlighting the significant interest in funding diversification within the finance sector It is clear that funding diversification is not a universal strategy; its effectiveness varies based on factors such as bank size, operational complexity, regulatory frameworks, and market conditions To investigate this theory in Vietnam, empirical research was conducted involving 33 Vietnamese banks and 5 foreign banks, categorized into large-cap, mid-cap, and small-cap groups.

The regression analysis across three groups indicates that increased funding diversification, reflected by a decrease in LIQDIV, correlates with improved bank efficiency By diversifying funding sources, banks can lessen dependence on any single source, which reduces concentration risks and establishes a more stable funding base This strategy not only optimizes funding costs but also broadens financing options and enhances overall financial stability.

Funding diversification significantly enhances banks' operating efficiency by lowering funding costs and improving resource allocation This strategic approach enables banks to utilize capital more effectively, boosting their market competitiveness Additionally, by distributing risks among different funding sources, banks can better withstand economic downturns and crises, ultimately strengthening their operational resilience.

Funding diversification can enhance operating efficiency, but its success is not guaranteed and relies on the bank's strategic implementation Banks must establish robust risk management frameworks, optimize resource allocation, and ensure that diversification aligns with their core competencies and strategic goals Additionally, strict compliance with regulatory requirements is crucial, as it underpins the effectiveness and sustainability of banking operations.

The relationship between funding diversification and operating risk reveals a complex interplay of factors that can influence operational risks While diversification may enhance a bank's resilience, it can also expose institutions to new risks, particularly when venturing into unfamiliar asset classes or markets Expanding banking activities beyond core expertise introduces operational complexities that can result in errors and challenges Additionally, regulatory and compliance risks may arise when banks diversify into areas governed by different regulatory frameworks and requirements.

Diversifying funding sources is crucial for banks as it mitigates operational risks and enhances risk management By avoiding concentration risk, banks can improve their resilience against external shocks and adapt more effectively to fluctuating market conditions, ultimately leading to greater operational excellence.

This thesis explores the impact of funding diversification on operating efficiency and risk in the banking sector, categorizing banks into large-cap, mid-cap, and small-cap groups This classification facilitates a deeper understanding of the unique dynamics within each category, highlighting the distinct challenges and opportunities they encounter in implementing funding diversification strategies The findings indicate that funding diversification positively influences operating efficiency by optimizing costs and resource allocation, ultimately enhancing competitiveness However, achieving these benefits requires careful implementation and compliance with regulatory standards, providing valuable insights for policymakers and practitioners in the banking industry to develop more effective strategies for improving efficiency and resilience across various bank sizes.

The relationship between funding diversification and operating risk is complex, as diversification can introduce new risks while simultaneously providing opportunities to mitigate operational risk through effective risk management and investment in lower-risk assets or markets.

In conclusion, banks must actively engage in developing and implementing tailored risk management strategies that suit their unique circumstances Successful funding diversification enhances operational efficiency and mitigates risk, reflecting a bank's capability to manage complex financial dynamics while maintaining high standards of financial stability and operational excellence.

This thesis enhances the understanding of the intricate relationship between funding diversification, operating efficiency, and risk in the banking sector It aims to encourage further research and discussion in this vital area of finance, ultimately contributing to more resilient banking systems in a dynamic global financial environment However, the study faces limitations, particularly due to the focus on operational banks in Vietnam, where mergers and acquisitions are more common than bankruptcies Recent government support for struggling banks, such as the restructuring of "zero dong banks," has introduced a survival bias, complicating the analysis of merged entities Additionally, bank mergers typically result in decreased fund diversification and operational efficiency, increasing operational and liquidity risks Future research should prioritize the evaluation of merged banks and examine institutions with strong ecosystems, like MBB, TCB, BIDV, and VCB, particularly regarding their fund diversification through subsidiaries.

This article identifies key limitations in its model, which examines the impact of factors like net interest margin, funding diversity, bank size, loan to asset ratio, equity to asset ratio, non-performing loans, and loan-to-deposit ratio on fund diversification, risk, and operational performance However, it fails to consider the regulatory framework of the Vietnamese banking sector, governed by the State Bank of Vietnam and the Ministry of Finance, where compliance with government decrees is vital for adhering to monetary policies Future research should focus on the timing and application of these regulations, potentially segmenting analysis based on significant legal changes and their delays Additionally, greater emphasis should be placed on macroeconomic factors and the adoption of international standards such as Basel II and III, given their influence on bank profitability and risk, indicating that the current model may need further refinement.

This study highlights the importance of future research in emerging economies, particularly within the ASEAN region, by focusing on Vietnam's banking sector To strengthen the primary findings, it suggests exploring alternative methodologies, such as bootstrap DEA and stochastic frontier analysis (SFA), to enhance the estimation of bank technical efficiency in subsequent studies.

The author confirms no potential conflicts of interest and emphasizes adherence to ethical research practices, ensuring transparency and honesty throughout the study This disclosure statement aims to assure all parties that the research is conducted with integrity and respect for ethical principles Any conflicts of interest or funding sources will be transparently disclosed in the full report Participants have received informed consent forms, and their confidentiality and privacy rights are rigorously protected Furthermore, the research complies with all relevant institutional and regulatory guidelines, ensuring responsible and ethical conduct.

This study was conducted without any external funding or financial support, ensuring that all aspects, including data collection, analysis, and reporting, were carried out independently The research was solely for academic purposes, with no conflicts of interest related to funding sources, highlighting the impartiality and integrity of the findings presented.

Abbas, F and Ali, S (2021) Dynamics of diversification and banks’ risk-taking and stability:

Empirical analysis of commercial banks, Wiley online library Available at: https://onlinelibrary.wiley.com/doi/abs/10.1002/mde.3434 (Accessed: 16 August 2021)