The impact of capital adequacy on the credit growth at commercial banks from 2015 2022

ABSTRACT This research study aims to examine the impact of capital adequacy ratio CAR on credit growth in commercial banks in Vietnam, along with other factors, including bank size, liqu

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON

THE IMPACT OF CAPITAL ADEQUACY

ON THE CREDIT GROWTH AT

COMMERCIAL BANKS FROM 2015-2022

NGUYEN DANG DUC HIEU

ID No: 20003017 Intake 6

Supervisor: Dr Le Hai Trung

September 2023

FINANCE DISSERTATION ON THE IMPACT OF CAPITAL ADEQUACY ON THE CREDIT GROWTH AT COMMERCIAL BANKS

FROM 2015-2022

NGUYEN DANG DUC HIEU

ID No: 20003017 Intake 6 Supervisor: Dr Le Hai Trung

DECLARATION

I declare that the master's thesis on "The impact of capital adequacy on the credit growth

at commercial banks from 2015-2022" is my own research work The data and research results in the thesis are honest and have never been published in any other research work

Hanoi, October 10 th 2023

Signature of Student and date Signature of Supervisor and date

TABLE OF CONTENT

ABSTRACT 4

LIST OF FIGURES 6

LIST OF TABLES 6

CHAPTER 1 : RESEARCH BACKGROUND 7

1.1 Research introduction 7

1.2 Research statement 9

1.3 Research objectives 11

1.4 Research questions 11

1.5 Research scope 12

1.6 Research methodology 12

1.6.1 Research method 12

1.6.2 Data collection 12

1.6.3 Data analysis 12

1.7 Research structure 12

CHAPTER 2 : LITERATURE REVIEW 14

2.1 The concept of capital adequacy ratio (CAR) 14

2.1.1 Definition of CAR 14

2.1.2 The importance of CAR at commercial banks 16

2.2 The concept of credit growth rate 17

2.2.1 Definition of credit growth rate 17

2.2.2 The importance of credit growth rate at commercial banks 19

2.3 Factors affecting the credit growth rate at commercial banks 20

2.3.1 Macroeconomic factors of the country 20

2.3.2 Internal factors of commercial banks 22

2.4 Previous research on the impact of CAR on credit growth at commercial banks 23

2.4.1 Previous research and studies on the impact of CAR on credit growth rate at commercial banks 23

2.4.2 Research gaps 28

2.5 Proposed research model 30

2.5.1 Introduction of research model 30

2.5.2 Introduction of variables and hypotheses in the research model 31

CHAPTER 3 : FINDINGS AND DISCUSSIONS 37

3.1 The current situation of CAR and credit growth rate of commercial banks in Vietnam 37

3.1.1 The current situation of CAR of commercial banks in Vietnam 37

3.1.2 The current situation of credit growth rate of commercial banks in Vietnam 38 3.2 Research findings 40

3.2.1 Descriptive analysis 40

3.2.2 Correlation matrix 41

3.2.3 Regression analysis 42

3.3 Discussions 44

CHAPTER 4 : RECOMMENDATIONS AND CONCLUSION 46

4.1 Recommendations 46

4.2 Conclusion 50

4.3 Limitations and future research 50

REFERENCES 52

ABSTRACT

This research study aims to examine the impact of capital adequacy ratio (CAR) on credit growth in commercial banks in Vietnam, along with other factors, including bank size, liquidity, profitability, and financial leverage The sample consisted of 22 commercial banks in Vietnam from 2005 to 2021 The GMM regression model was used to evaluate the impact of CAR on credit activities of different banks with varying characteristics

The findings of the study suggest that the CAR has a positive relationship with credit growth in commercial banks in Vietnam, along with return on equity (ROE) Banks with a higher CAR are more likely to withstand losses, better resist risks, and meet regulations

on risk and liquidity Consequently, this enhances lending and leads to an increase in credit growth Similarly, the ROE variable also had a positive impact on credit growth The remaining three independent variables, including liquidity, net interest income, and financial leverage, were not statistically significant with p>0.1 The results of the net interest margin and bank size variables had a negative impact on credit growth, contrary

to the author's and previous studies' initial expectations

The study's findings suggest that capital adequacy ratio and return on equity are critical factors in promoting credit growth in commercial banks These findings can be useful for policymakers and commercial banks to make informed decisions regarding capital requirements, liquidity management, and credit operations

However, the study also has some limitations The research sample is limited to 22 commercial banks in Vietnam, and the data is unbalanced tabular data due to limitations

in the number of published banks, particularly in the period before 2010 Additionally, the study did not consider external factors, such as macroeconomic conditions, that may affect credit growth

Further research can explore the impact of external factors such as macroeconomic conditions and regulatory changes on credit growth in commercial banks in Vietnam Overall, the findings of this study provide valuable insights into the relationship between CAR and credit growth in commercial banks in Vietnam and can be useful for policymakers and commercial banks to make informed decisions regarding capital requirements, liquidity management, and credit operations

LIST OF FIGURES

Figure 4-1: CAR of Vietnamese commercial banks in 2022 37

Figure 4-2: Credit growth rate of Vietnamese commercial banks from 2015-2019 39

LIST OF TABLES Table 2-1: Description of variables in the research model 35

Table 4-1: Descriptive analysis 40

Table 4-2: Correlation matrix 41

Table 4-3: VIF 42

Table 4-4: GMM model results 43

CHAPTER 1 : RESEARCH BACKGROUND 1.1 Research introduction

Between 2008 and 2020, the world experienced two crises and economic recessions Macroeconomic reports indicate that the damage caused by the COVID-19 pandemic was more than four times that of the global financial crisis in 2009 (Foroni et al., 2020) In Vietnam, economists predict that the bad debt ratio will increase in the near future, particularly after the expiration of Circular 14/2021/TT-NHN (State Bank of Vietnam, 2021) As commercial banks are a major component of the country's economic development, they always prepare for unpredictable situations when the national and global economies change Laws and regulations that apply international standards have been issued by the government for commercial banks to implement at a very early stage Among these regulations, the requirements for maintaining adequate capital levels are considered important in determining the safety of banks against capital risk during their operation Bateni et al (2014) stated that regulations on maintaining capital safety levels are one of the important requirements for safety in the specific field of banking (Bateni et al., 2014) Previously, Ngo (2006) affirmed that there was no relationship between the capital safety ratio and the profits of commercial banks in Vietnam during the period of 1996–2005 under Basel I regulations (Ngo, 2006) Circular 41/2016/TT: The State Bank

of Vietnam under Basel II standards maintained a minimum capital safety ratio of 8%, and Circular 22/2019/TT: The State Bank of Vietnam under Basel III standards maintained a capital safety ratio of 9%

In the Vietnamese commercial banking system, credit activities are always a top priority and play a crucial role, accounting for about 70%–80% of banks' profits Reasonable credit growth creates a large, stable, and safe source of income for banks Therefore, bank managers and leaders must identify the factors that impact credit growth Although the capital of commercial banks only accounts for a small proportion of the total capital (usually about 5%), it plays an extremely important role in carrying out some functions

pressure on the liquidity of banks Banks have simultaneously increased the race for deposit interest rates, increasing the cost of capital usage To prevent bank failures and protect the interests of depositors, commercial banks must maintain and emphasize the importance of the capital adequacy ratio in banking activities according to Basel standards The main risks include credit risk, liquidity risk, operational risk, and other risks that affect the bank's capital safety The State Bank of Vietnam is in the process of applying Basel II standards to determine capital standards to limit commercial bank business risks and strengthen the financial system, helping to promote sustainable credit growth However, there will be many issues regarding capital and credit activities during implementation Therefore, understanding the relationship between the capital adequacy ratio and credit growth will greatly support managers in planning policies, direction, and development

The capital adequacy ratio (CAR) has been the subject of extensive research worldwide It has recently garnered much attention from researchers in Vietnam who are interested in determining a reasonable CAR for commercial banks The CAR serves as a safety indicator in the operations of banks, and it is clearly defined in the regulations of international banks (basic standards) The CAR is an essential index for banks and investors to identify the risk level of each bank It is often used to signal the risk of the bank to depositors and to increase the stability and efficiency of the commercial banking system With the help of this ratio, investors can determine the ability of the bank to repay outstanding debts and risks Banks that guarantee this CAR have the ability to withstand financial shocks, protect themselves, and protect their customers Therefore, the CAR plays a crucial role in the credit growth of commercial banks The changes in the CAR coefficient in the business operations of commercial banks may have opposite effects on their ability to expand credit On the one hand, strict capital safety requirements help increase the stability of the banking system, thereby increasing the trust of market members in the safe operations of commercial banks (Noss & Toffano, 2016) This reduces the capital cost of commercial banks by reducing the risk premium, thereby increasing their ability to meet the credit demand of the economy On the other hand,

raising capital requirements will increase the capital costs faced by commercial banks when issuing credit, as the minimum capital requirement increases with the increase in risky assets, thereby reducing the ability to provide credit to the economy (Heuvel & Skander, 2008) Bernanke and Lown (1991) pointed out that equity capital is much more expensive than liabilities Therefore, commercial banks tend to hold fewer high-risk convertible assets such as loans (Bernanke & Lown, 1991) A higher CAR makes commercial banks reduce the amount of credit capital provided to the economy Nonetheless, a lower CAR poses a significant risk to the bank's operations and the banking system as a whole Therefore, it is vital to find a balance between the CAR and the credit growth of commercial banks

In conclusion, the CAR is a crucial factor in the safety and stability of the banking system, and its effects on credit growth are complex and require careful consideration from policymakers and researchers

1.2 Research statement

The relationship between the CAR coefficient and credit growth is a crucial factor in determining the necessity of capital adequacy management in the operations of commercial banks It is a common practice for banks to increase credit growth to increase profits However, this has led to increased pressure on the liquidity of banks, which in turn has led to a race to increase deposit interest rates and capital usage costs This phenomenon highlights the importance of maintaining and emphasizing the capital adequacy ratio in banking operations according to Basel standards Commercial banks are exposed to various risks, including credit risk, liquidity risk, operational risk, and other risks that affect the bank's capital adequacy The issue of factors affecting the capital adequacy ratio of commercial banks has been extensively studied worldwide, but empirical studies have not yet produced consistent results and conclusions regarding the impact of the CAR coefficient on the level of credit growth of commercial banks

Numerous investigations and research projects worldwide have explored the correlation between capital adequacy ratios and the expansion of credit Zhao (2006) discussed the impact of capital regulation on the credit growth of Chinese commercial banks between

1995 and 2003 Surprisingly, the minimum capital requirement imposed by regulatory authorities did not significantly constrain the growth of loans in the Chinese commercial banking sector during the mentioned time frame (Zhao, 2007) Bridges et al (2014) explored the impact of macroprudential regulatory capital requirements on bank capital ratios and lending, using data from the United Kingdom spanning 1990 to 2011 The study concluded that macroprudential regulatory capital requirements impact both bank capital ratios and lending behavior, with banks adjusting their capital buffers in response

to requirements and making changes to their lending patterns, particularly in certain sectors of the economy (Bridges et al., 2014) Wachiuri (2016) examined the impact of capital adequacy requirements on credit creation by commercial banks in Kenya Data from 43 commercial banks between 2001 and 2011 was analyzed The study found that the capital adequacy requirements introduced by Basel 1 had a negative effect on credit creation in Kenya, particularly in 2000 and 2009, when the requirements were increased The trend in credit creation changed every four years due to shocks from incremental improvements in capital adequacy requirements by the Central Bank of Kenya (Wangui, 2016) However, previous research and studies have been conducted in different countries and in different time frames, which leads to a lack of exploration into the nuanced effects

of changing capital requirements on lending behavior, taking into consideration different economic conditions and the potential heterogeneity among commercial banks

In Vietnam, previous studies have evaluated the factors affecting the credit growth of Vietnamese commercial banks, such as Yen (2019) and Thuan (2021) Some studies have also evaluated the impact of the CAR ratio on other aspects of commercial banking operations, such as profitability and bankruptcy risk (Ngan et al., 2021) However, there has been no specific study evaluating the impact of the CAR ratio on the credit growth of commercial banks

Therefore, it is crucially necessary to have a study that aims to contribute to previous studies by providing empirical evidence of the impact of the CAR ratio on the credit growth of Vietnamese commercial banks during the period 2010–2022 This study will encompass all changes in legal regulations regarding the CAR ratio in Vietnam from the past to the present The findings of this study will provide a better understanding of the relationship between the CAR coefficient and credit growth in Vietnamese commercial banks and may help banking industry managers make more informed decisions regarding capital adequacy management in their operations.

1.3 Research objectives

The research aims to explore and identify the influence of capital adequacy ratio (CAR)

on credit growth at Vietnamese commercial banks during 2010 – 2022 period, then provide valuable insights to help bank managers and authorities to have policies to enhance credit growth for profitability while ensuring sustainable CAR Below are the detail research objectives:

 To analyze theories and framework on the impact of CAR on credit growth of commercial banks

 To evaluate the impact of CAR on the credit growth of commercial banks in Vietnam from 2015 to 2022

 To provide managerial implications for banking managers to manage CAR and leverage CAR for credit growth of commercial banks

 What are recommendations for banking managers to manage CAR and leverage CAR for credit growth of commercial banks?

1.5 Research scope

 Space: This research focuses on commercial banks in Vietnam The sample includes 20 commercial banks with different characteristics in terms of scale, ownership nature, and business model

 Time: the time range for this research is from 2010 to 2022

1.6 Research methodology

1.6.1 Research method

This study utilizes both qualitative and quantitative approaches for its research The qualitative method enables us to build a solid foundation for the research by collecting and analyzing theoretical frameworks from previous empirical research The quantitative method employs the GMM estimation model on panel data to determine the impact of capital sources on the credit growth of Vietnamese commercial banks from 2010 to 2022 This is an optimized model aimed at addressing issues of endogeneity, heteroscedasticity, and autocorrelation

 Chapter 1: Research background: offers an introductory overview of the research, presenting the problem statement, objectives, research queries, scope, and methodology employed in the investigation

 Chapter 2: Literature review: reviews the relevant literature on the concept of capital adequacy ratio (CAR), credit growth rate, factors affecting the credit growth rate at commercial banks, previous research on the impact of car on credit growth at commercial banks, and proposed research model

 Chapter 3: Research methodology: describes research methods, research model, data collection and data analysis

 Chapter 4: Findings and discussion: presents the current situation of the capital adequacy ratio (CAR) and credit growth rate of commercial banks in Vietnam The chapter also includes the findings of the study, which are based on descriptive and regression analyses Finally, the chapter concludes with a discussion of the research findings

 Chapter 5: Recommendations and conclusion: provides recommendations based on the research findings The chapter also includes a conclusion that summarizes the study's main findings and limitations Finally, the chapter suggests future research directions

CHAPTER 2 : LITERATURE REVIEW 2.1 The concept of capital adequacy ratio (CAR)

2.1.1 Definition of CAR

The Capital Adequacy Ratio (CAR), as defined by the Basel Committee on Banking Supervision, is a key regulatory measure designed to ensure that banks maintain an appropriate level of capital to cover various risks they face (Basel, 2017) The Basel Committee, a global standard-setting body for banking regulations, introduced the concept of CAR as part of the Basel Accords to promote the stability and integrity of the global financial system

The CAR is calculated by comparing a bank's regulatory capital (also referred to as its capital base) with its risk-weighted assets It aims to quantify the relationship between a bank's capital and its exposure to credit, market, and operational risks The formula for calculating the CAR is:

CAR = (Regulatory Capital) / (Risk-Weighted Assets)

The Basel framework outlines specific categories of regulatory capital, known as tiers, that are considered eligible for inclusion in the calculation of the CAR These tiers are designed to ensure that the capital being used to support the bank's activities is of sufficient quality and stability The two primary tiers are:

 Tier 1 Capital: This is the core capital of a bank, including common equity and retained earnings Tier 1 capital is the most reliable form of capital and can effectively absorb losses

 Tier 2 Capital: This includes other forms of capital, such as subordinated debt and hybrid instruments Tier 2 capital provides additional loss-absorbing capacity but

is considered less stable than Tier 1 capital

The Basel Accords, particularly Basel III, have established specific minimum capital adequacy ratios that banks are required to meet Basel III sets a minimum common equity

Tier 1 (CET1) capital ratio, which is a subset of the overall CAR This minimum CET1 ratio serves as a crucial benchmark to ensure banks have sufficient high-quality capital to weather adverse economic conditions

In 1999, the first CAR coefficient was regulated in Vietnam according to Decision No 297/1999/QD-The State Bank of Vietnam issued on August 25, 1999, which stipulates the ratios for ensuring safety in the activities of official credit organizations According to this decision, the minimum capital safety ratio is 8%, but the calculation method is simple and does not fully reflect the content of Basel I Decision No 457/2005/QD-The State Bank

of Vietnam, dated April 19, 2005, issued by the State Bank of Vietnam, regulates the ratios for ensuring safety in the activities of credit organizations In this decision, the operating safety coefficients are specifically and in detail regulated, including the minimum capital safety ratio, credit limit for customers, repayment capacity ratio, maximum ratio of short-term capital sources used for medium and long-term loans, equity participation limit, and share purchase limit Among them, the minimum capital safety ratio is 8%, the implementation time lasts for 3 years, during which each bank must increase at least 1/3 of the missing ratio, and the calculation method has relatively comprehensive access to Basel I In recent years, commercial banks in Vietnam have paid attention to risk management in addition to profit growth As of the end of 2019, 18 commercial banks have been approved to apply Circular No 41/2016/TT—The State Bank of Vietnam—on capital adequacy ratio for banks and foreign bank branches In terms of the orientation of the State Bank of Vietnam, the issuance of Circular No 41/2016/TT-The State Bank of Vietnam and Circular No 13/2018/TT-The State Bank of Vietnam are legal documents built on the risk management foundation according to the Basel II Agreement Banks that apply the capital adequacy ratio calculation according to Circular No 41/2016/TT—The State Bank of Vietnam—must maintain the capital adequacy ratio at a minimum of 8% Banks that apply the capital adequacy ratio calculation according to Circular No 22/2019/TT—The State Bank of Vietnam—must maintain the capital adequacy ratio at a minimum of 9%

The CAR framework allows regulatory authorities to ensure that banks are adequately capitalized to absorb potential losses, reduce the risk of insolvency, and enhance the overall stability of the financial system It provides a standardized measure that facilitates international comparisons and helps promote a level playing field among banks operating

in different jurisdictions

2.1.2 The importance of CAR at commercial banks

Capital safety is considered one of the indicators of a bank's financial health, reflecting the bank's ability to withstand unexpected losses in the future and the use of the bank's financial leverage ratio (Aspal & Nazneen, 2014) The Capital Adequacy Ratio (CAR) is used to measure the safety of a bank's capital, reflecting the soundness and "health" of a bank to ensure that it can withstand losses from its operations (Bateni et al., 2014; Dang, 2011; Aspal & Nazneen, 2014) Additionally, there must be surplus capital to ensure daily operations and future expansion (Abusharba et al., 2013) Maintaining a capital level in line with regulations allows a bank to avoid failures and collapses by absorbing losses (Abusharba et al., 2013; Aspal & Nazneen, 2014)

The capital adequacy ratio reflects a bank's inherent resilience to absorb losses in periods

of crisis, as represented by the return on equity (ROE) and net interest margin (NIM) of commercial banks The higher the capital adequacy ratio, the greater the inherent strength

of the bank, ensuring smooth operation and protecting the interests of shareholders, investors, and depositors (Aspal & Nazneen, 2014) The Basel Committee on Banking Supervision's regulations on capital calculation are the international standard for calculating a bank's capital adequacy ratio The Basel Committee recommends that banks maintain a minimum capital adequacy ratio to control the stability and efficiency of the financial system (Aspal & Nazneen, 2014) The minimum recommended capital adequacy ratio by Basel is no less than 8% (Basel Committee on Banking Supervision, 2006)

However, this ratio differs in some countries due to regulations from the central bank, financial management, and supervision agencies of the respective countries For example,

in Egypt, the minimum required capital adequacy ratio (CAR) is maintained at 10% Ansary & Hafez, 2015) In Vietnam, the State Bank of Vietnam requires a minimum CAR

(El-of not less than 9% for banks that calculate the ratio according to Circular No 22/2019/TT-The State Bank of Vietnam, or not less than 8% for banks that calculate the ratio according to Circular No 41/2016/TT-The State Bank of Vietnam In India, the minimum CAR is also maintained at 9% (Aspal & Nazneen, 2014) The CAR of commercial banks is an indicator of the relationship between their equity capital and risk-weighted assets Wall (1985) believed that applying proper capital management standards was beneficial for the sound operation of commercial banks Moreover, a good capital adequacy ratio helps banks avoid bankruptcy risk by providing liquidity and increasing profits in the future (Pandey, 2005) Rose and Hudgins (2013) also stated that if full risk management is a crucial factor in determining bank profits, adequate tools enable banks to respond timely to unpredictable economic fluctuations (Rose & Hudgins, 2013)

2.2 The concept of credit growth rate

2.2.1 Definition of credit growth rate

The history of development shows that credit is both an economic realm and a product of the commodity production system It exists parallel to, and develops alongside, the commodity economy and is an important driving force for promoting the development of the commodity economy to higher stages Credit exists and develops through many socio-economic forms In general, credit is when one party (the lender) provides financial resources to another party (the borrower), which will be repaid within an agreed-upon timeframe, usually with interest There are many concepts of bank credit, but they can be summarized as follows: Bank credit is an asset transaction between the bank and the borrower (for example, economic organizations or individuals in the economy) in which the bank transfers assets to the borrower for use for a certain period of time according to the agreement, and the borrower is unconditionally responsible for repaying both the principal and interest to the bank when they are due

Credit growth occurs when commercial banks use policies to increase mobilized capital, meet credit, discount, and invest in entities such as economic organizations and individuals who need to borrow, step by step increasing profitability, market share, and brand on the market Credit growth is the use of policies by commercial banks to increase their mobilized capital and meet the demand for credit issuance, discounting, and investment in economic organizations, individuals, etc in order to gradually increase profits, market share, and brand on the market (Hoang, 2009) For the commercial banking system in Vietnam, interest from credit is the main source of revenue for commercial banks Therefore, credit activities play a crucial role for banks Credit growth

is a matter of great concern for commercial banks because reasonable and quality credit growth will create stable and safe income sources for banks (Duong & Yen, 2011)

The formula for calculating the credit growth rate is as follows:

Credit growth rate = (total credit balance this period minus total credit balance last period) / total credit balance last period

There are three main sources of capital that can be mobilized for investment in development and credit growth They are:

 State capital sources: state budget, capital in state-owned enterprises, public assets, national assets

 Capital sources in the population: savings in households in the form of money or valuable assets such as gold, silver, gems, antiques, etc

Foreign investment capital sources: ODA is a form of foreign investment It is often called aid capital because these investment amounts are usually interest-free loans or low-interest loans with a long-term borrowing period In addition, there are other forms, such

as commercial loans and remittances from overseas Vietnamese, such as FDI

2.2.2 The importance of credit growth rate at commercial banks

Credit itself and credit growth play crucial roles in three different aspects

by effectively allocating financial resources in the economy Banking activities turn temporary idle monetary means in society into efficient business tools By providing timely capital to meet the capital needs of businesses and creating conditions for continuous production, expansion, and technological development, bank credit helps the economy grow, create jobs, and increase labor productivity Bank credit also serves as a tool for the state to regulate the social economy Through credit investment in priority areas and sectors, it promotes growth and development, creating an efficient economic structure Additionally, bank credit contributes to circulating currency, stabilizing currency values through interest rate tools, and expanding and developing international economic relations through international credit activities Effective and quality foreign credit activities create trust among trading partners in international trade activities, facilitating the circulation of imported and exported goods

 For customers: Bank credit promptly meets customers' capital needs With diverse advantages in terms of time, borrowing purposes, easy access, and the ability to meet large capital sources, bank credit satisfies the diverse needs of customers This helps investors utilize suitable credit sources in a timely manner to seize business opportunities and earn profits Bank credit also improves the efficiency of businesses' capital use Businesses will have an additional source of capital to do business, but they have the responsibility to repay the principal and interest Therefore, businesses will make efforts to use this capital efficiently to fulfill debt repayment obligations and generate profits Moreover, with the flexibility of time and interest rates of bank credit, it encourages businesses to actively and creatively use capital appropriately for each period

 For banks: Credit is a crucial activity that accounts for the largest proportion of banks' total assets (about 70%) and brings in the main source of income for banks (around 70% to 80%) Through credit activities, banks can expand other services such as payments, cards, deposits, foreign exchange business, securities, consulting, insurance, etc This diversifies business activities, increases profits, and reduces risks for banks

From this, it is clear that high-quality credit growth leads to high credit operation efficiency Quality credit is provided by the bank in accordance with the State Bank's capital safety standards, closely managed to ensure that borrowers use the capital for the intended purposes This ensures the timely recovery of capital and interest and limits the risk of capital loss Therefore, increasing the growth of quality credit will improve credit operation efficiency It is crucial to maintain credit growth rates while ensuring credit quality to achieve high efficiency The bank's credit growth should not exceed its capital, human resources, and technology resources Excessive credit growth can lead to the bank's inability to pay, a decline in credit quality, affect credit operation efficiency, and even cause losses Therefore, managers need to implement appropriate policies to manage macro- and internal issues within the bank Only then can credit growth be effective and ensure the sustainable development of the bank

2.3 Factors affecting the credit growth rate at commercial banks

2.3.1 Macroeconomic factors of the country

Commercial banks play a crucial role in transferring capital in the economy and are one

of the main entities that help the State Bank of Vietnam implement its monetary policies

As such, macroeconomic factors have a significant impact on the credit growth rate of commercial banks Several studies have explored the factors influencing credit growth in commercial banks Guo, Stepanyan, and Guo (2011) examined the factors affecting the credit growth of commercial banks in emerging economies between 2001 and 2010 They found that both domestic and foreign sources of finance contribute positively to the credit growth of banks (Stepanyan & Guo, 2011)

Vu and Nahm (2013) considered macroeconomic factors such as real GDP per capita growth rate, annual inflation rate, interest rate spreads, and financial market development (Vu & Nahm, 2013) Meanwhile, Pouw and Kakes (2013) studied the impact of macroeconomic variables on the activities of 28 banks in various countries, examining variables such as GDP, unemployment rate, interbank interest rates, and annual inflation rate (Pouw & Kakes, 2013) Imran and Nishat (2013) focused on the supply side by studying the growth rates of bank credit provided to the private sector and found that foreign debts, domestic deposit growth, economic growth rates, and exchange rates have a significant impact on bank credit growth in Pakistan (Imran & Nishat, 2013) Mileris (2015) examined the macroeconomic factors affecting the activities of commercial banks

in Lithuania during the economic recession period (2009–2010) (Mileris, 2015) Sharma and Gounder (2012) researched the factors affecting the credit growth of commercial banks in six economies in the South Pacific region, finding that loan interest rate and inflation rate had a negative impact on the credit growth of banks, while deposit growth and bank asset size had positive effects on credit growth (Sharma & Gounder, 2012) Singhn and Sharma (2016) focused on the impact of three key objectives in monetary policy, namely GDP, inflation rate, and unemployment rate, on the activities of commercial banks in India

Duong and Yen (2011) found that the average interest rate differential had a negative effect on the credit growth of commercial banks in Vietnam, while Loc and Thep (2015) concluded that the credit growth rate of people's credit funds in the Mekong Delta region was affected by factors such as economic growth rate and inflation (Duong & Yen, 2011; Loc & Thep, 2015)

In summary, macroeconomic factors affecting the credit growth of commercial banks include interest rates, GDP growth, and the inflation rate, as revealed by domestic and foreign studies

2.3.2 Internal factors of commercial banks

In addition to macroeconomic factors, internal factors within banks also significantly impact the credit growth rate of commercial banks Aydin (2008) analyzed the impact of bank ownership (state-owned or foreign-owned), return on assets (ROA), and the difference between lending and deposit interest rates on the credit growth rate of banks in Central and Eastern European countries (Aydin, 2008) Tracey and Leon (2011) conducted research on the impact of internal factors on the credit level of commercial banks in Jamaica, Trinidad, and Tobago The author found that factors such as the rate of increase in capital, the rate of growth in safe loans over loan growth of banks, and the rate

of growth in deposits affect credit growth in these countries (Tracey & Leon, 2011) Phuoc (2017), Tan (2012), Duong and Yen (2011) developed models of factors affecting credit growth in different economic phases in many countries (Duong & Yen, 2011; Tan, 2012; Phuoc, 2017) However, most studies focus on factors that have clear and less variable impacts on credit growth, such as capital growth rate, liquidity, net profit/owner's equity, and net interest income ratio The assumption is that the first three factors have a positive correlation with the annual credit growth rate of commercial banks, while the last factor has a negative impact Guo and Stepanyan (2011) pointed out that foreign debt and domestic deposit volume are internal factors that affect the credit growth rate of commercial banks (Stepanyan & Guo, 2011) Tamirisa and Igan (2006) analyzed and identified some factors with clear impacts on credit growth, such as economic growth rate, bank ownership, liquidity, and the difference between lending and deposit interest rates (Tamirisa & Igan, 2006) Duong and Yen (2011) confirmed that the rate of deposit growth and liquidity have a positive effect on credit growth of commercial banks Therefore, the internal factors affecting the credit growth rate of commercial banks include the ratio of deposit capital, bad debt ratio, owner's equity ratio, liquidity ratio, and bank size (Duong & Yen, 2011)

2.4 Previous research on the impact of CAR on credit growth at commercial banks

2.4.1 Previous research and studies on the impact of CAR on credit growth rate at commercial banks

Research on the impact of higher capital requirements is not new and typically focuses on how they affect lending (Francis & Osborne, 2012; Aiyar et al., 2014; Noss & Toffano, 2014; Bridges et al., 2014) or real economic activity (Berrospide & Edge, 2010; Bank for International Settlements, 2010) However, many studies have focused on analyzing the impact of bank capitalization instead of direct capital requirements (Bernanke et al., 1991; Albertazzi & Marchetti, 2010; Fonseca & González, 2010; Jimenez et al., 2013) Some of these studies explain the changes in different capital ratios due to different capital requirements This is a simplified hypothesis and not always true (see discussion below) The reason is often due to a lack of observed changes in capital requirements in past data

or limited access to such data

Increasing the bank’s capital can potentially reduce its risk and borrowing costs Modigliani and Miller (1958) demonstrated that, under ideal conditions, this effect is opposite to any potential increase in financing costs from changing the financing structure Essentially, increasing capital becomes costless for banks and has no significant impact on lending volume or interest rates (Modigliani & Miller, 1958) The degree to which MM applies in real-world scenarios is crucial Studies that allow for MM deviation generally find a very small impact of capital requirements on lending rates due to tax protection for debt Requirements higher than 1 percentage point are associated with an increase in the basic rate by 2 points (Kashyap et al., 2010; Miles et al., 2011) Studies assuming a more limited MM deviation show impacts of up to 13 basis points, which is still modest (Elliott, 2009; Bank for International Settlements, 2010) Due to difficulties

in estimating the impact of stability, many studies rely on model adjustments The main parameter in these models is the Modigliani and Miller bias, which measures the extent to which an increase in capital requirements can increase overall bank financing costs Generally, these adjustment results are consistent with the findings of field experiments

Most studies before the financial crisis focused on the connection between bank lending and capital not capital requirements, and mainly on credit challenges in the early 1990s (Bernanke et al., 1991; Hancock & Wilcox, 1993, 1994; Peek & Rosengren, 1995) It was only after the global financial crisis of 2008-2009 that the relationship between bank capital requirements and lending gained greater attention This connection became significant when it was believed that financial issues associated with mortgage-backed securities could severely impact lending by US banks For instance, Albertazzi and Marchetti (2010) discovered evidence of a decline in credit supply in Italy because of low bank capital requirements and scarce liquidity following the Lehman collapse (Albertazzi

& Marchetti, 2010)

In recent years, macroprudential policy has gained importance in regulatory reform efforts aimed at preventing crises like the one in 2008-2009 One of the main tools used in this policy is capital requirements Several scholars have explored the effect of the minimum capital adequacy ratio (CAR) on the credit growth of commercial banks after the 2008 financial crisis, resulting in three distinct sets of findings on the impact of CAR on credit growth

The first set of findings highlights how increased capital requirements can negatively impact bank lending Three papers including Aiyar et al (2014), Bridges et al (2015) and De-Ramon et al., (2016) analyzed the effects using detailed micro-level datasets for UK banks Aiyar et al (2014) found that regulated banks decreased lending growth to meet stricter capital requirements, resulting in a 6-8 percentage point decrease in the long run

to meet a 1 percentage point increase in capital requirement However, they also discovered significant leakage to overseas bank branches not regulated by UK supervisors, leading to increased lending by those branches (Aiyar, et al., 2014) Bridges

et al (2015) observed that capital requirements affect the bank's capital adequacy ratio and temporary credit supply Specifically, banks tend to gradually rebuild the surplus capital they originally held while increasing lending growth, indicating an important link between bank surplus capital and lending growth Higher capital requirements are mainly reflected in the growth of lending to commercial real estate and businesses, as well as

secured household lending In the short term, the impact of a 1 percentage point increase

in capital requirements on bank lending growth ranges from 1 to 8 percentage points, depending on loan category (Bridges, et al., 2014) De-Ramon et al (2016) discovered that higher capital requirements have a negative impact on bank lending and asset growth, but a positive impact on the bank's capital ratio, even when their surplus capital was relatively high Their results show that, similar to previous studies, banks tend to rebuild their surplus capital However, they only increase their capital ratio in the long run by about 90% of the changes in their capital requirement, meaning they do not fully rebuild their surplus capital This is consistent with the concept of the bank's capital target (De-Ramon, et al., 2016)

According to the second research group, high capital ratios negatively affect lending by banks This is discussed in works such as Nicolo (2015), Noss and Toffano (2016), and Bank for International Settlements (2010) Nicolo's study found that changes in the ratio

of equity capital to assets have negative effects not only on bank lending, but also on bank operations in both the short and long term The author explains that changes in the ratio of equity capital to assets represent changes in capital requirements without considering the existence of surplus capital (Nicolo, 2015) In their 2014 research, Noss and Toffano analyzed the historical ratio of equity capital to assets and economic-financial variables to determine how changes in capital requirements affect lending Their approach was a "top-down" supplement to micro "bottom-up" studies, relying on aggregate data and a VAR model with sign constraints Their findings suggest that increasing the ratio of equity capital to assets during prosperous times leads to reduced lending, particularly for corporate loans (Noss & Toffano, 2016) Noss and Toffano's observations align with those of Nicolo (2015), who also attributed changes in the ratio of equity capital to assets

to changes in capital requirements According to Bank for International Settlements (2010), the CET ratio (or target capital), which measures the ratio of total equity to higher weighted debt, has a significant impact on the interest rate spread for loans and loan volume The study found that a 1 percentage point increase in the CET ratio within four

quarters, on average The authors also discuss the importance of the transition phase for higher capital requirements If the transition phase is short, banks may choose to reduce their credit supply to quickly increase the capital ratio If the transition phase is long, the impact on the credit supply of banks may be minimal, as they may use retained earnings

or issue new shares to increase capital (Bank for International Settlements, 2010)

Finally, the third group discovered that having higher capital ratios positively affects bank lending For instance, Berrospide and Edge (2010) analyzed data on bank holding companies in the US from the early 1990s (when the Basel Accord was first implemented) to the global financial crisis in 2008 They found that several bank capital ratios, such as the owner's equity to total assets ratio, total capital ratio, risk-based Tier 1 capital ratio, and tangible common equity ratio, as well as capital surplus, had a positive impact on credit growth This suggests that increasing bank capital leads to a higher supply of credit The impact ranged from 0.25 to 2.75 percentage points in magnitude (Berrospide & Edge, 2010)

There are inconsistencies in the relationship between higher capital ratios and bank lending The second and third groups have different reasons for changes in the bank's capital ratio If the capital ratio increases due to higher capital requirements and the bank's capital debt does not change or even decreases, this can have a negative impact on bank lending This is because the bank will try to avoid financing costs for lending with capital

On the other hand, if the capital ratio increases as a result of the bank's profit accumulation and capital requirements remain stable, the bank's capital debt increases, which creates room for expanding the supplementary accounting balance sheet This, in turn, can have a positive impact on bank lending

In their study, Malovana and Frait (2017) discovered that the response of credit-to-GDP ratio and actual GDP growth varied when banks increased their asset capital ratio They used a VAR time series model to analyze six European countries and found that this caused uncertainty in the reaction to higher capital ratios Overall, the bank's capital ratio

is not always an appropriate representative variable for capital requirements It only works as a representative variable for the bank's capital requirements when the difference

between capital requirements and the bank's sufficient capital ratio is relatively small In other words, if the bank has to increase its sufficient capital ratio to meet higher capital requirements However, this is not the case for many banks, including those in the Czech Republic (Malovana & Frait, 2017) As previously discussed, banks typically maintain their capital adequacy ratios above regulatory requirements, resulting in a surplus of capital Malovaná and Frait (2017) and others have studied the motives behind this behavior and its policy implications Pfeifer et al (2019) have emphasized the significance of the current capital surplus for a bank's response to regulatory reform packages If a bank has a high capital surplus, increased capital requirements are expected

to limit its capital adequacy ratio as the bank will use the surplus capital and reduce the surplus However, for banks that intentionally create a capital surplus for a specific purpose, such as accommodating asset expansion or future asset structure changes, higher capital requirements may prompt them to increase their capital adequacy ratio to maintain the existing surplus (Pfeifer, et al., 2019) Therefore, it is essential to distinguish between the intentional and unintentional creation of capital surplus, as well as between the bank's capital adequacy ratio and capital surplus, to better analyze the transmission of higher capital requirements and understand bank behavior Different reactions can be expected in response to intentional and unintentional capital buffers, as well as time Banks often announce higher "capital reserves" (such as a reserve capital transfer) a year before they become effective Therefore, banks may start to react before the actual need for additional capital arises If a bank maintains a large enough unintentional capital buffer, simply due

to high long-term profitability, it can use it to maintain its intentional capital buffer If the unintentional capital buffer is not large enough, the bank can increase its capital adequacy ratio through a combination of the reactions listed above These are just two simple examples of possible reactions However, banks may choose different reactions, such as permanently reducing intentional capital buffers, increasing their capital adequacy ratio just before the effective date, or rebuilding their intentional capital buffer over a longer period of time If a bank creates intentional capital buffers to fit a credit supply expansion plan, higher capital requirements may slow down the growth rate of credit or even

intentional capital buffers over the long run and restore credit growth, as shown by Bridges et al (2015), Berrospide & Edge (2010), and Adrian & Shin (2010)

In Vietnam, Thuan (2021) has demonstrated that the annual growth rate of mobilized capital has a positive impact on credit growth in Vietnam Specifically, an increase of 1%

in the growth rate of mobilized capital per year results in a 0.12% increase in Vietnamese commercial banks' credit growth Banks act as intermediaries, both borrowing and lending money Therefore, having sufficient mobilized capital enables banks to have more sources to lend, and they can then seek new customers who have a demand for efficiently using mobilized capital Phuoc (2017), Duong and Yen (2011) have developed models of factors affecting credit growth in different economic periods in many countries However, most of these models focus on factors that have clear and less variable impacts through periods, such as the growth rate of capital, liquidity, net profit/owner's equity, and net interest income ratio The hypotheses suggest that the first three factors have the same direction of change as the annual credit growth rate of commercial banks, while the last factor has an opposite impact Quynh (2017) used data from 25 Vietnamese commercial banks in the period of 2007-2014 through REM and GMM estimation methods, indicating that the credit growth of banks is influenced by the growth of mobilized capital The study emphasizes sustainable credit growth based on capital adequacy ratio managed strictly according to Basel standards

Overall, previous research has produced inconsistent findings regarding the impact of capital requirements on bank lending Some studies have found a negative impact of higher capital requirements on lending, while others have found a positive impact The impact of higher capital ratios on lending can vary depending on whether the capital ratio increases due to higher capital requirements or due to the bank's profit accumulation 2.4.2 Research gaps

The previous research on the impact of capital adequacy ratio (CAR) on credit growth has identified some gaps that require further exploration One such gap is the limited focus on the impact of specific types of capital requirements on credit growth, such as Tier 1

capital or equity capital to assets ratio This gap highlights the need for more research to understand the impact of different types of capital requirements on credit growth, which will help policymakers to design more effective regulatory frameworks Another research gap is the limited analysis of the impact of capital requirements on the lending behavior

of different types of banks, such as state-owned versus privately owned banks This gap suggests that there is a need for more research to understand the differences in lending behavior between different types of banks and the impact of capital requirements on their lending behavior Understanding these differences will help policymakers to design regulatory frameworks that are appropriate for the different types of banks

The limited exploration of the impact of capital requirements on the lending behavior of banks in different regions or economic contexts is also considered as a significant gap of previous studies This gap highlights the need for more research to understand the impact

of capital requirements on lending behavior in different regions and economic contexts This will help policymakers to design regulatory frameworks that are appropriate for different regions and economic contexts Besides, the limited investigation of the impact

of capital requirements on lending behavior in the context of technological advancements

in banking, such as the rise of financial technology (fintech) and digital banking should be taken into consideration This gap suggests that there is a need for more research to understand the impact of capital requirements on lending behavior in the context of technological advancements in banking This will help policymakers to design regulatory frameworks that are appropriate for the changing landscape of banking

Finally, a research gap is the limited analysis of the impact of capital requirements on the availability of credit for specific sectors or types of borrowers, such as small and medium-sized enterprises (SMEs) or households This gap suggests that there is a need for more research to understand the impact of capital requirements on the availability of credit for specific sectors or types of borrowers This will help policymakers to design regulatory frameworks that support the financing needs of these sectors or borrowers

In summary, previous research has identified several research gaps that require further