Monetary policy transmission and bank lending channel in Vietnam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY ***** NGUYEN PHUC CANH MONETARY POLICY TRANSMISSION AND BANK LENDING CHANNEL IN VIETNAM Major: Finance and Banking Code: 62.34.02.01 SUMMARY OF PHD THESIS ACADEMIC ADVISORS Prof Dr SU DINH THANH Assoc Prof Dr VO XUAN VINH HO CHI MINH CITY, 2016 LIST OF AUTHOR’S PUBLICATION Articles Võ Xuân Vinh, Nguyễn Phúc Cảnh (2015), “Các yếu tố ảnh hưởng đến kênh cho vay truyền dẫn sách tiền tệ” (in English: The determinant of Bank lending channel in Monetary policy transmission), Journal of Banking technologies 112, 7/2015, p.38-47, Ho Chi Minh City Banking University, Vietnam Nguyễn Phúc Cảnh (2015), “Cơ chế truyền dẫn Chính sách tiền tệ: Các nghiên cứu lý thuyết thực nghiệm giới” (in English: Monetary policy transmission: literature review), Journal of banking science and training 154, 3/2015, p.29 – 41, Institution of Banking, Vietnam Võ Xuân Vinh & Nguyễn Phúc Cảnh (2014), “Monetary policy and bank credit risk in Vietnam pre and post global financial crisis”, Contemporary Studies in Economic and Financial Analysis, Vol 96; Risk Management Post Financial Crisis: A Period of Monetary Easing, Emerald Group Publishing Limited, United Kingdom, p.277-290 Nguyễn Phúc Cảnh, Trầm Thị Xuân Hương, Võ Xuân Vinh (2014), “Truyền dẫn sách tiền tệ: số mô hình kiểm định phù hợp” (in English: Monetary policy transmission: some suitable econometric testing models), Journal of Development and Integration 16 (26), P.41 - 46, 6/2014, UEF, Vietnam Nguyễn Phúc Cảnh, Trầm Thị Xuân Hương, Võ Xuân Vinh (2014), “Nới lỏng định lượng lạm phát mục tiêu giới - học cho Việt Nam” (in English: Quantitative easing and inflation targeting in the world and lessons for Vietnam), Journal of Banking technology 99, p.40 - 48, 6/2014, Banking University Ho Chi Minh City, Vietnam Nguyễn Phúc Cảnh, Trầm Thị Xuân Hương, Võ Xuân Vinh (2014), “Truyền dẫn sách tiền tệ qua kênh lãi suất ngân hàng Việt Nam trước sau khủng hoảng” (in English: Monetary policy transmission through the interest rate channel in Vietnam before and after the crisis), Journal of Economic Development 283, p.42 - 67, 5/2014, University of Economics Ho Chi Minh City, Vietnam Nguyễn Phúc Cảnh, Trầm Thị Xuân Hương, Võ Xuân Vinh (2014), “Truyền dẫn sách tiền tệ qua kênh tỷ giá Việt Nam – trước sau khủng hoảng” (in English: Monetary policy transmission through exchange rate channel in Vietnam - before and after the crisis), Journal of banking science and training 143, p.27 - 35, 4/2014, Institution of Banking, Vietnam Nguyễn Phúc Cảnh (2014), “Truyền dẫn sách tiền tệ qua kênh giá tài sản tài chính: nghiên cứu thực nghiệm Việt Nam”, Journal of Integration and Development 19(29), 11-12/2014, UEF Nguyễn Phúc Cảnh (2013), “Chính sách lạm phát mục tiêu- chế giám sát độc lập hội cho việt nam trình tái cấu trúc hệ thống ngân hàng thương mại” (in English: Inflation targeting policy - independent monitoring mechanisms and opportunities for Vietnam in the restructuring process of the commercial bank system), Journal of Integration and Development 13 (23), 11/2013, UEF, Vietnam Nguyễn Phúc Cảnh, Nguyễn Quốc Anh, Nguyễn Hồng Quân (2013), “Đặc điểm ngân hàng tác động đến truyền dẫn sách tiền tệ qua kênh tín dụng ngân hàng Việt Nam” (In English: Bank characteristics affecting the transmission of monetary policy through bank credit channel in Vietnam), Journal of Economic Development 276, 10/2013, p.75 – 91, UEH, Vietnam Seminars Võ Xuân Vinh, Nguyễn Phúc Cảnh (2014), “Monetary policy transmission in Vietnam: evidence from a VAR approach”, the 27th Australasian Finance and Banking conference, 16 – 18 December 2014, UNSW Business School, Sydney, Australia Trầm Thị Xuân Hương, Võ Xuân Vinh, Nguyễn Phúc Cảnh (2014), “Effect of monetary policy to trade balance on open developing country: a case of Vietnam”, ICFE 2014 - The International Conference on Finance and Economics Ton Duc Thang University, Ho Chi Minh City, Vietnam, June 2nd - 4th, 2014 Nguyễn Phúc Cảnh (2014), “Bank risk pre and post global financial crisis in Vietnam: a survey”, ICFE 2014 - The International Conference on Finance and Economics Ton Duc Thang University, Ho Chi Minh City, Vietnam, June 2nd - 4th, 2014 Trầm Thị Xuân Hương, Võ Xuân Vinh, Nguyễn Phúc Cảnh (2014), “Hiệu công cụ lãi suất điều hành sách tiền tệ Việt Nam” (in English: Effective tools in managing interest rate monetary policy Vietnam), Workshop Summary some theoretical issues - over 30 years of practical innovation, Economic University of Ho Chi Minh City, 01/21/2014 Trầm Thị Xuân Hương, Nguyễn Phúc Cảnh (2013), “Truyền dẫn Chính sách tiền tệ qua kênh lãi suất ngân hàng thương mại Việt Nam” (in english: The transmission of monetary policy through interest rate commercial banks in Vietnam), Risk Analysis Workshop in interest rates of commercial banks operating in HCM City and precautions, Bank University, Vietnam Research projects Nguyễn Phúc Cảnh, Võ Xuân Vinh (2015), “Vai trò tỷ giá hối đoái điều hành sách tiền tệ Việt Nam” (in English: the role of exchange rate in Vietnamese monetary policy conducting), University of Economics Ho Chi Minh City, CS-2015-44 Võ Xuân Vinh, Nguyễn Phúc Cảnh (2014), University research projects “Monetary policy and bank credit risk in Vietnam pre and post global financial crisis”, University of Economics Ho Chi Minh City, Vietnam (member) Nguyễn Phúc Cảnh, Nguyễn Quốc Anh, Nguyễn Hồng Quân (2013), University research project: “Đặc điểm ngân hàng tác động đến truyền dẫn sách tiền tệ qua kênh tín dụng ngân hàng Việt Nam” (in English: Bank characteristics affect to monetary policy transmission through credit channel in Vietnam), University of Economics Ho Chi Minh City Book Võ Xuân Vinh, Nguyễn Phúc Cảnh (2016), Referenced book: “Chính sách tiền tệ: nghiên cứu ứng dụng mô hình định lượng” (in English: Monetary policy: applied studies by econometric models), UEH publishing house, University of Economics Ho Chi Minh City Abstract This study tries to investigate the existing of interest rate channel, exchange rate channel, asset price channel, and bank lending channel in Vietnam which are seen as the main channels in monetary policy transmission In addition, this study tries to investigate the determinants of bank lending channel and the effects of the 2008 global financial crisis on bank lending channel in Vietnam This study has found the evidence of cost channel in Vietnam that reflects the ineffective of monetary policy in controlling inflation thus it is a big challenge for Vietnamese policy makers in conducting monetary policy But, this study did not find statistical evidences of exchange rate channel and asset price channel which may be suggest that they are weak or not exist in Vietnam This study found the evidences of bank lending channel in Vietnam, it was also affected by the commercial bank characteristics such as bank capital, bank size This study also found that the 2008 global financial crisis had significant effects on bank lending channels which is stronger in crisis First of all, this study has contribution to the empirical literature about the existence of cost channel in a small open economy Secondly, this study contributes empirical evidences of bank lending channel, the determinants and the effects of the crisis on bank lending channel in an emerging market Thirdly, this study has major contributions to Vietnamese policy makers in conducting monetary policy and stabilizing the banking system and financial markets, especially in the case of facing further external shocks in the future such as the global crisis With the academic contributions, this study defined that economists should test all transmission channels in one model for better controlling the interactions between channels and better measuring the effectiveness of each channel With the empirical results, this study has significant practical implications for Vietnamese policy makers in developing debt and equity markets, controlling the risky activities of banking systems and applying unconventional monetary policies such as inflation targeting CHAPTER INTRODUCTION 1.1 The overview of Vietnamese economy and monetary policy 1.1.1 The Vietnamese economy The Vietnamese economy has gone through high growth periods from 1994 especially in period of 2000 to 2007 In which, it has had two slow periods due to the 1997 Asian economic crisis and the 2008 global financial crisis 1.1.2 The State Bank of Vietnam The operations of SBV were more apparent in the 2007 – 2012 period when the Vietnamese economy fell into crisis In 2010, the Vietnamese parliament approved the 2010 state bank act with changes in comparison to the 2003 version, in which the most important change was the SBV’s function of monetary policy conducting in article 1.1.3 The Vietnamese monetary policy SBV had expanded the monetary policy in the 2000 – 2007 period to cope with the 1997 Asian crisis and to stimulate economic growth, then they expanded and tightened monetary policy on numerous occasions in the 2008 – 2012 period 1.1.4 The Vietnamese monetary policy and macroeconomics factors 1.1.4.1 Market interest rates Market deposit rates and lending rates had changed in the same patterns with VNIBOR, they were stable at a low level in the 2000 – 2007 period, but they fluctuated with the changes in monetary policy by increasing in 2008, decreasing in 2009, increasing in 2010, 2011, and dropping in 2012 1.1.4.2 Inflation The overheating economic growth, large and inefficient public investment, a sharp increase of aggregate demand after joining WTO, long lasting budget deficit, high credit growth, and high money supply growth in combination with the increase in the world commodity price, and other things had pushed Vietnamese inflation to a high rate in 2008 – 2012 period 1.1.4.3 Exchange rate The USD/VND rate increased from 10,966 in 1994 to 15,994 in 2006 and 20,293 in 2012, in which USD/VND increased with a low stable step after 2000 But after 2007, the USD/VND continued a high rise in 2008, 2009, 2010, and 2011, and stilled in 2012 1.1.4.4 Credit Credit was expanded quickly and broadly in 2000 – 2007 period from 50,000 billion VND in 1994 to over 700,000 billion VND in 2006 and over 3,200,000 billion VND in 2012 1.1.4.5 Stock markets Vietnam developed stock markets in the early 21st century with Ho Chi Minh stock exchange in 2000 (HSX) then Hanoi stock exchange in 2006 (HNX), but they are still small and lack of financial products for the economy needs 1.1.4.6 Summary Vietnamese economy grew rapidly in the 2000 – 2007 periods The rapid economic growth was seemly contributed from expansionary monetary policy, bank credit operations with low inflation and low interest rates, and other elements Monetary policy was expanded with low policy rates, high money supply growth in the 2000 – 2007 period, but it reversed and change many times in the 2008 – 2012 period 1.2 Research objectives and questions Firstly, this study attempts to test the existence of interest rate channel, exchange rate channel, and asset price channel in Vietnam, these results are significant considerations for Vietnamese policy makers in conducting the monetary policy Furthermore, this study attempts to investigate the existence of bank lending channels and then analyze the determinants of bank lending channel including the effects of the 2008 global financial crisis In order to achieve these research objectives, this study goes to answer these questions Which channels of interest rate channel, exchange rate channel and asset price channel exist in Vietnam? Does bank lending channel exist in Vietnam? And bank size, bank capital, bank liquidity, bank risk, and the 2008 global financial crisis effect on bank lending channels in Vietnam? 1.3 The scope of this study This study is going to examine the monetary policy transmission and bank lending channel in Vietnam in period from 2003 to 2012 1.4 Research methodologies and data 1.4.1 Methodologies In the first main body, this study is going to use the VAR models to investigate the existence of interest rate channel, exchange rate channel, and asset price channel in Vietnam through a monthly time series from 2003 to 2012 one by one Then this study is going to use the SVAR model as the main model to check the test the evidences of above channels In the second main body, this study uses the system GMM model to investigate bank lending channel in Vietnam, in which this study also measures the impacts of bank characteristics and the 2008 global financial crisis on bank lending channel by yearly panel data in 2003 – 2012 period 1.4.2 Research data This study will use two kinds of data: Vietnamese macroeconomic data and microeconomic data from commercial banks in the 2003-2012 period 1.5 Some key concepts Monetary policy, Central bank, Monetary policy targets, Monetary policy tools, Monetary policy transmission, Bank lending channel 1.6 The structure of study Chapter 1: Introduction Chapter 2: Theoretical framework and Literature review Chapter 3: Methodologies Chapter 4: Empirical evidences from Vietnam Chapter 5: Conclusions and policy implications CHAPTER THEORETIAL FRAMEWORK AND LITERATURE REVIEW 2.1 Monetary policy 2.1.1 Introduction Monetary policy is expressed in many aspects, it has seen as actions that are undertaken by central bank to alter money supply or policy rates to aim at inflation stability, economic growth, fully employment, and exchange rate stability (Araújo, 2015, Drakos and Kouretas, 2015, Sánchez, 2012) 2.1.2 Central bank Central bank is monopolized for printing and issuing money, it is also the government bank, the bank of commercial banks, the lender of last resort, the manager of payment system, the agency for monetary policy implementation, and the supervisor of the banking system (Blinder et al., 2008, Friedman, 1999) 2.1.3 Monetary policy targets Central bank conducts monetary policy to aim at economic stability, optimal unemployment, financial system stabilizing, but price stability is always the most important target (Cecchetti and Krause, 2002, Geraats, 2002, Issing, 2004, Spyromitros and Tuysuz, 2012, Van der Cruijsen and Demertzis, 2007, Jean Louis and Balli, 2013) 2.1.4 Monetary policy tools Central bank uses different policy rates to conduct monetary policy such as rediscount rate, and interbank offer rate Central bank also buys or sells short-term securities on the open market to directly impact on money supply and money demand thereby it has an effect on market interest rates and other economic elements (Thành and Hằng, 2008) And they use mandatory reserve requirements to impact on money supply since reserve requirements have a direct influence on the monetary creating multiplier that is created by banking system 2.1.5 The ineffectiveness of monetary policy Expansionary monetary policy sometimes can’t stimulate economic growth due to the liquidity trap (Dieppe and McAdam, 2006) Deflation is also another problem in monetary policy conducting 2.1.6 Monetary policy and fiscal policy The interactions between monetary policy and fiscal policy affect the effectiveness of overall macroeconomic policies in many countries (Buti et al., 2001a, Buti et al., 2001b, Melitz, 2000, Leith et al., 2015) 2.1.7 Unconventional monetary policies 2.1.7.1 Quantitative easing program Quantitative easing program (QE) is an unconventional monetary policy to cope with the deflation and near nil interest rate situation by the central banks in Japan, U.K., and U.S The real effects of QE remain controversial, yet it helped curb and prevent the crisis and promote economic growth in Japan (Girardin and Moussa, 2011), but it couldn’t the same in the case of the U.K (Lyonnet and Werner, 2012) 2.1.7.2 Inflation targeting policy Inflation targeting policy originated in New Zealand in 1989, then many countries have applied this policy, such as Chile, Canada, Israel, England, Sweden, Finland, Australia and Spain (Svensson, 2000) In inflation targeting, central banks set an inflation target for monetary policy, and then will anything to achieve this target 2.1.8 Summary Central banks conduct monetary policy to aim at price stability, economic growth, full employment, and financial system stability However, central banks can’t achieve all targets once, there are some tradeoffs between targets such as inflation and unemployment Central banks conduct monetary policy through policy rates, open market operations, and reserve requirements to impact on aggregate demand and aggregate supply through intermediate variables such as market interest rates, exchange rates, asset prices, and expectations Monetary policy may not take effect in the case of deflation, liquidity trap, or near nil interest rates 2.2 Monetary policy transmission 2.2.1 Conceptual framework Monetary policy transmission is the process that transmits the changes in policy rates or money supply to a series of other changes in economic variables such as market interest rates, asset prices, exchange rates, cash flow, bank credit supply, private spending and consumption, etc and ultimately aims at price, output and unemployment (Mankiw and Taylor, 2011) The changes in money supply or policy rates of central bank have an effect on other economic variables which are studied in the IS – LM model that is seen as the basis of monetary policy transmission with forms many transmission channels 2.2.2 Monetary policy transmission channels 2.2.2.1 Interest rate channel Central bank may change money supply and/or policy rates to alter real interest rates, investment, aggregate demand, and output The interest rate channel is confirmed by many studies as the main transmission channel of monetary policy in many countries and areas (Friedman, 1956, Hannan and Liang, 1993, Taylor, 1995, Cecchetti, 1995) 2.2.2.2 Exchange rate channel Besides IRC, ERC is also an important channel of monetary policy transmission (Golinelli and Rovelli, 2005, Demir, 2014), which transmits monetary policy through exchange rate to trade and investment activities, and other international shocks, thus ERC will be almost ineffective in a closed economy Empirical studies confirm that ERC is an important transmission channel besides IRC in many countries However there are some cases such as Eritrea, Mengesha & Holmes (2013) didn’t find evidence of ERC, but they found the existence of ERC in the illegal foreign exchange market 2.2.2.3 Asset price channel APC has two related mechanisms: Tobin's q theory and wealth effect, both mechanisms are related to the relationship between the asset price with investment and consumption APC exists in most developed countries, yet it just exists in a few developing countries due to the lack of debt and equity security markets (Mishra and Montiel, 2012) Interest rate channel Figure 4.1 Impulse response function of CPI in IRC Response to Cholesky One S.D Innovations ± S.E Res pons e of CPI to LIPVN Res pons e of CPI to VNIBOR 3 2 1 0 -1 -1 -2 -2 10 11 12 Res pons e of CPI to DLER 10 11 12 10 11 12 Res pons e of CPI to CPI 3 2 1 0 -1 -1 -2 -2 10 11 12 Source: Author’s calculation Inflation reacts positively with Vietnams interbank offer rate and lending rates of commercial banks, which defines the existence of a cost channel in Vietnam This result confirms the existence of IRC in Vietnam that also proves the hypothesis Exchange rate channel Figure 4.2 Impulse response function for ERC Response to Cholesky One S.D Innovations ± S.E Res pons e of CPI to LIPVN Res pons e of CPI to VNIBOR 3 2 1 0 -1 -1 -2 -2 10 11 12 Res pons e of CPI to DLNEER 10 11 12 10 11 12 Res pons e of CPI to CPI 3 2 1 0 -1 -1 -2 -2 10 11 12 Source: author’s calculation Impulse response function results show no transmission of a monetary policy through the exchange rate channel since inflation almost has no response to exchange rate shocks This result confirms the hypothesis that ERC may be weak or almost not exist in Vietnam Asset price channel Figure 4.3 Impulse response function of VAR(5) for APC Response to Cholesky One S.D Innovations ± S.E Res pons e of CPI to LIPVN Res pons e of CPI to VNIBOR 3 2 1 0 -1 -1 -2 -2 10 11 12 Res pons e of CPI to DLVNI 10 11 12 10 11 12 Res pons e of CPI to CPI 3 2 1 0 -1 -1 -2 -2 10 11 12 Source: Author’s calculation APC via stock price may not exist in Vietnam due to a low-developed stock market, while other financial intermediaries including commercial banks thrive and play an important role in capital markets This result confirms the hypothesis that APC is weak or not exist in Vietnam 4.1.3 SVAR model results Figure 4.4 Impulse response function of SVAR Res pons e to Choles ky One S.D Innovations ± S.E Response of CPI to DLOIL Response of CPI to LIPVN Response of CPI to VNIBOR 3 2 1 0 -1 -1 -1 -2 -2 10 11 12 -2 Response of CPI to DLM2 10 11 12 3 2 1 0 -1 -1 -1 -2 -2 10 11 12 10 11 12 11 12 Response of CPI to DLER Response of CPI to DLNEER -2 Response of CPI to DLVNI 10 11 12 10 11 12 10 Response of CPI to CPI 3 2 1 0 -1 -1 -2 -2 10 11 12 Source: author’s calculation While responses of inflation to policy rate, money supply, and market interest rates reconfirm the existence of a cost channel in Vietnam the same as the results from previous VAR models 4.1.4 Robustness check In order to check the robustness of the models, M2 of Vietnam is collected to replace VNIBOR in proxy for Vietnam’s monetary policy; IRC, ERC, and APC are tested by VAR model one by one Figure 4.5 Impulse response function of VAR for IRC with DLM2 Response to Cholesky One S.D Innovations ± S.E Res pons e of CPI to LIPVN Res pons e of CPI to DLM2 3 2 1 0 -1 -1 10 11 12 Res pons e of CPI to DLER 10 11 12 10 11 12 Res pons e of CPI to CPI 3 2 1 0 -1 -1 10 11 12 Source: author’s calculation This result also confirms that policy rate is more effective in monetary policy conducting in comparing with money supply of SBV because the money supply hasn’t affected the lending rates of commercial banks When we use RDR to replace for VNIBOR, Impulse response function shows that CPI has a strong positive responses to DRDR, DLER so that IRC exists The positive responses of CPI to policy rate and lending rate indicate that a cost channel is exists as previous results in VAR and SVAR models The robustness test is continued with a new proxy for Vietnam monetary policy: refinance rate (RFR) Results show the same idea with the rediscount rate because SBV has changed both RDR and RFR have the same pattern 4.2 Bank lending channel in Vietnam 4.2.1 Data We used a unique dataset of bank balance sheet items and macroeconomic variables for Vietnam over the period from 2003 to 2012 Our data was collected from different sources, bank characteristics data are hand collected from financial reports and annual reports, other data are from ADB and other sources Table 4.9 GMM data description LnLOAN SIZE LIQ CAP LLP Δi LnGDP ΔRFR ΔRDR Mean 16.320 17.260 0.381 0.130 1.180 0.188 14.271 0.663 0.631 Maximum 19.990 20.242 0.823 0.712 7.425 6.143 14.795 5.330 -4.430 Minimum 11.478 12.198 0.036 0.027 0.032 -5.339 13.481 -3.920 5.750 Std Dev 1.700 1.556 0.149 0.103 1.005 3.847 0.403 2.800 3.094 282 283 282 279 271 300 270 270 N (ind.) 282 Source: author’s calculation 4.2.2 GMM results and discussions In order to examine the bank lending channel, we should put all determinants into one model which is presented in table 4.11 Table 4.11 Bank lending channel with whole effects of bank characteristics Δln(loan)t Whole effects without risk Whole effects Coeff P-Value Coeff P-Value ln(loan)t-1 -0.595*** 0.000 -0.621*** 0.000 Ln(GDP) t-1 0.417*** 0.003 0.420*** 0.003 Δi -0.207*** 0.009 -0.212** 0.029 Δit-1 -0.021*** 0.002 -0.021*** 0.002 Δi*sizet-1 0.010** 0.019 0.010* 0.080 Δi*capt-1 0.041 0.449 0.044 0.439 Δi*liqt-1 0.012 0.700 0.013 0.721 0.039 0.979 Δi*llpt-1 sizet-1 0.172 0.205 0.197 0.155 capt-1 -0.093 0.773 -0.007 0.984 liqt-1 0.174 0.542 0.144 0.620 llpt-1 2.439 0.552 2.926 0.503 AR(-2) test (p-value) 0.955 0.913 Sargan test (p-value) N 0.128 182 0.125 182 *, **, *** indicate significance level of 10%, 5% and 1% respectively Source: author’s calculation The results are consistent with all above findings with these results means that a bank lending channel exists in Vietnam, and especially Vietnamese commercial banks have risk-taking action in responding with monetary policy But as the study of Nguyen and Boateng (2013), then Nguyen and Boateng (2015a) and Nguyen and Boateng (2015b) suggest that when we use commercial bank characteristics to investigate the bank lending channel we will face to problem of data normalization due to the heteroskedasticity between commercial banks thus we should standardize commercial bank data to be more reliable measurement of bank characteristics Thus, this study standardizes the data of commercial bank characteristics by counting the mean of each characteristics including bank size, bank capital, bank liquidity and bank loan loss provision for each bank, then we minus the value of each characteristic for its mean one by one for each bank Table 4.13 presents estimation results when we put all variables into one model, these results are interesting Table 4.13 Bank lending channel with whole effects by new measure of bank characteristics Δln(loan)t Whole effects without risk Whole effects Coeff P-Value Coeff P-Value ln(loan)t-1 -0.548*** 0.000 -0.548*** 0.000 Ln(GDP) t-1 0.323*** 0.005 0.322*** 0.005 Δi -0.040*** 0.000 -0.039*** 0.000 Δit-1 -0.025*** 0.000 -0.025*** 0.000 Δi*sizet-1 0.043*** 0.000 0.042*** 0.000 Δi*capt-1 0.222*** 0.001 0.217*** 0.001 Δi*liqt-1 -0.006 0.901 0.001 0.979 0.773 0.593 Δi*llpt-1 sizet-1 0.188 0.101 0.189* 0.099 capt-1 0.470 0.111 0.478 0.105 liqt-1 0.323 0.186 0.324 0.185 llpt-1 1.960 0.575 1.474 0.683 AR(-2) test (p-value) 0.967 0.955 Sargan test (p-value) 0.305 0.275 N 182 182 *, **, *** indicate significance level of 10%, 5% and 1% respectively Source: author’s calculation These results also confirm the consistent of our findings, this also indicates the significant effects of bank capital on bank lending when Vietnamese commercial banks respond to monetary policy rate 4.2.3 Robustness test Firstly, rediscount rate (RFR) and refinance rate (RDR) are used to replace for VNIBOR in proxy for Vietnamese monetary policy, but all the bank characteristics are measured by standardized way as we presented in previous section due to better results in GMM Estimation results from GMM with RFR and RDR indicate the same evidence as in GMM with VNIBOR in all aspects Continue with the GMM model, this study replaces VNIBOR by rediscount rate (RDR) Results show the same evidences as in the GMM model with RFR and VNIBOR So that, we can confirm the consistency of our findings in this section 4.2.4 The effects of the crisis on the bank lending channel in Vietnam In order to investigate the effects of the 2008 global financial crisis on the bank lending channel in Vietnam, we can divide the data into two sub-periods including pre-crisis and post-crisis periods, but due to the lack of data this study does not use this method Instead, we use the proxy for the 2008 global financial crisis, this is VIX (the implied volatility of S&P 500 options contracts) that is suggested to be used to investigate the impacts of the crisis (Druck et al., 2015) The results show the same evidence as previous estimations in section 4.2.1 and 4.2.2 for the same variables While the significant positive effects of VIX on bank lending indicate that Vietnamese commercial banks expand their lending in crisis periods, that means the bank lending channel is stronger in crisis periods Meanwhile, the interaction terms between policy rate, bank size, bank capital and VIX have significant positive effects on bank lending of the Vietnamese commercial banks and indicate that the bank lending channel is stronger in larger banks and higher capitalized bank in crisis These results confirm the hypothesis Table 4.18 The impacts of the 2008 global financial crisis on bank lending channel in Vietnam Bank lending channel Bank lending channel Bank lending channel with VNIBOR with RDR with RFR Δln(loan)t Coeff P-Value Coeff P-Value Coeff P-Value ln(loan)t-1 -0.536*** 0.000 -0.671*** 0.000 -0.672*** 0.000 Ln(GDP) t-1 0.372*** 0.003 0.474*** 0.000 0.476*** 0.000 Δi -0.041*** 0.000 -0.043*** 0.000 -0.048*** 0.000 Δit-1 -0.031*** 0.000 -0.030*** 0.000 -0.032*** 0.000 Δi*sizet-1*vix 0.002*** 0.000 0.001*** 0.000 0.002*** 0.000 Δi*capt-1*vix 0.006*** 0.007 0.006** 0.031 0.006** 0.031 Δi*liqt-1*vix 0.000 0.917 -0.001 0.604 -0.001 0.603 Δi*llpt-1*vix 0.024 0.650 0.036 0.563 0.041 0.556 sizet-1 0.116 0.324 0.233** 0.046 0.230** 0.049 capt-1 0.060 0.843 0.540* 0.067 0.509* 0.084 liqt-1 0.354 0.152 0.364 0.153 0.363 0.154 llpt-1 2.634 0.467 2.493 0.495 2.418 0.507 Vix 0.010*** 0.001 0.007*** 0.011 0.007*** 0.010 AR(-2) test (p-value) 0.983 0.804 0.791 Sargan test (p-value) 0.357 0.182 N 182 182 *, **, *** indicates significance level of 10%, 5% and 1% respectively 0.180 182 Source: author’s calculation CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 5.1 Introduction This concluding chapter summarizes the empirical findings of this thesis 5.2 Review of research questions, methodology and findings 5.2.1 Research question 1: “Does an interest rate channel, exchange rate channel and asset price channel exist in Vietnam?” Results of VAR and SVAR models indicated the first main findings of this thesis: the cost channel existed in Vietnam, while they can not find the evidences of the exchange rate channel and asset price channel that means they may be weak or non-existent in Vietnam The evidence of cost channel puts Vietnamese policy makers into a tough dilemma situation as monetary policy is not effective in controlling inflation 5.2.2 Research question 2: Does a bank lending channel exist in Vietnam? And does bank size, bank capital, bank liquidity and bank risk have an effect and the 2008 global financial crisis effect on bank lending channel in Vietnam? By using the GMM model, the results have some main findings: Firstly, the loan level of Vietnamese commercial banks is converged which means that small Vietnamese commercial banks grow their credit portfolio to the level of large banks which will increase the competition in banking system Secondly, the monetary policy has a strong effect on bank lending in Vietnam including the current effects and lag effects on the following year, this means that the monetary policy transmits through the credit channel in Vietnam Thirdly, the main findings and the main aim of this study is to examine the existence of a bank lending channel Fourthly, bank size has a significant positive effect on bank lending of Vietnamese commercial banks, the bank capital also has a significant positive effect on bank lending in responding to monetary policy Fifthly, bank lending channel is stronger in crisis, besides that bank size and bank capital have more impacts on bank lending channel in crisis 5.3 Academic contributions This thesis makes some important contributions both to the literature on the monetary policy transmission and the bank lending channel The results for research question in Chapter provide strong statistical evidence of a cost channel, while the results in Chapter also can not find the statistical evidence of an exchange rate channel and an asset price channel in Vietnam Thus, as far as it could be ascertained, this is the first study with putting all literature together to test all channels of monetary policy in one model for a transition economy as Vietnam With regard to methodologies in testing the monetary policy transmission, many studies which presented in section 2.2 in Chapter show that they usually study each channel without consider all channels in one system This result shows that policy rates are more effective for measuring monetary policy than money supply, especially in small open economy such as Vietnam This thesis also contributes to the literature in terms of a bank lending channel in that the bank size, bank capital are more important for an emerging market as in Vietnam Therefore, along with bank size and bank capital, the results for controlled variables related to research question 2, such as the lag of a loan level and economic growth are important This adds to the credit channel literature that both credit demand and credit supplies are important in monetary policy transmission through a credit channel In terms of methodology, this thesis also offers a number of enhancements on existing studies It examines the results (related to research question 2) with a variety of measurement methods for bank characteristics which include several approaches that account for endogeneity, and the results remain very robust with such estimations 5.4 Policy implications 5.4.1 Choosing monetary policy tools In Vietnam, SBV can use open market operation, policy rate (base rate, rediscount rate and refinance rate), reserve requirement, and other tools as stated in the 2010 state bank act As investigation, both rediscount rate and refinance rate are effective in monetary policy transmission so that SBV can use both rates So that, it is better for SBV if they focus more on the rediscount rate that is better in identifying market expectations and navigating market interest rates In addition, if SBV uses the rediscount rate, they can limit the risk-taking activities of commercial banks in credit activities that help stabilize the banking system for Vietnam 5.4.2 Appling unconventional monetary policies In normality, a central bank can conduct monetary policy easier than some tough cases such as deflation, near nil interest rates, liquidity traps, or crisis Thus, quantitative easing program and inflation targeting policies are launched in many countries to tackle these dilemmas Vietnam is going to integrate more into the international market that will put more problems on Vietnam’s authorities, especially SBV in monetary policy conducting, thus SBV should learn new innovations in monetary policy conducting from other countries to apply to Vietnam in the future 5.4.3 Developing debt and equity markets As stated, Vietnam has to develop financial markets including markets for debts and equities more and more Despite the development of the stock market in Vietnam with the initiations of HSX and HNX in 2000 and 2006, the number of enterprises listed on the stock market is small Thus, Vietnam’s enterprises are limited in sources for funds, they still heavily rely on the banking system So Vietnam needs to develop capital markets which focus on debt markets to supply funds for the economy 5.4.4 Capability of commercial banks Besides the changes in the monetary policy and other financial markets, Vietnam has to make improvements in the banking system to make it safer and more efficient Firstly, Vietnamese commercial banks need to raise capital to ensure flexibility and defensive capabilities with macroeconomic shocks Secondly, because the size and liquidity of commercial banks have a significant impact on the monetary policy transmission and they respond strongly to monetary policy shocks, thus Vietnamese commercial banks should: consider the overall macro-economic factors, credit demand, their size and liquidity to plan an appropriate credit growth plan in business planning 5.4.5 Risk of commercial banks Liquidity risk was one of the biggest problems in the banking system in the instability stage from 2008 to 2012, which has reduced the financial health of Vietnamese commercial banks SBV should divide commercial banks into some small groups according to criteria: capital, asset liquidity, and credit risk, then they use suitable tools for monetary policy conducting Regarding the credit policy, SBV should eliminate limitation regulations in credit growth for all commercial banks, they should set a credit growth rate for each bank group that depends on capital, size, liquidity and risk 5.5 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