determinants affecting the liquidity of commercial banks

THE STATE BANK OF VIETNAM BANKING UNIVERSITY MINISTRY OF EDUCATION AND TRAINING HO CHI MINH CITY LÊ NGUYỄN QUỐC TOÀN MAJOR: BANKING AND FINANCE DETERMINANTS AFFECTING THE LIQUIDITY OF COMMERCIAL BANKS GRADUATION RESEARCH PAPER MAJOR: BANKING AND FINANCE MAJOR CODE: 7340201 HO CHI MINH, SEPTEMBER 2021 THE STATE BANK OF VIETNAM BANKING UNIVERSITY MINISTRY OF EDUCATION AND TRAINING HO CHI MINH CITY LÊ NGUYỄN QUỐC TOÀN MAJOR: BANKING AND FINANCE DETERMINANTS AFFECTING THE LIQUIDITY OF COMMERCIAL BANKS GRADUATION RESEARCH PAPER MAJOR: BANKING AND FINANCE MAJOR CODE: 7340201 SCIENCE INSTRUCTOR: Dr NGUYEN MINH NHAT HO CHI MINH, SEPTEMBER 2021 ii ABSTRACT The main purpose of this study is to explore the determinants affecting the liquidity of commercial banks in Vietnam Including internal bank factors and external macro factors Liquidity (LIQ) is measured using total liquid assets divided by total deposit balances The study used secondary databases collected from 27 commercial banks over a ten-year period from 2011 to 2020 Using regression method OLS-FEM-REM to obtain results The study shows that the equity use efficiency (ROE) is positively correlated with liquidity, has a significant impact on the variable LIQ The liquidity of commercial banks is completely unaffected by equity ratio (CAP), non-performing loan (NPL), bank size (BS) and economic growth (GDP) Meanwhile, profitability (EA) and loan on deposit ratio (LDR) have a negative impact on the variable LIQ With macro variables, inflation (INF) has a positive impact on the bank's liquidity; Economic growth has no impact on the liquidity of commercial banks Keywords: commercial bank, liquidity, loan on deposit ratio, non–performing loan, bank size, equity ratio, equity use efficiency, profitability, economic growth, inflation iii PLEDGE My name is Le Nguyen Quoc Toan I am a student of Banking university of Ho Chi Minh city, majoring in Banking and Finance The research paper: “Determinants affecting the liquidity of commercial banks” has been carried out at Banking university of Ho Chi Minh City This research is the author's own research work, the research results are honest, in which there are no previously published contents or contents made by others except sufficient citations or source citations in research paper The information and data used in the research processes are collected by author from various sources, which is completely truthful and clearly citied in the references Ho Chi Minh, 25th Sep 2021 Lê Nguyễn Quốc Toàn iv CONTENTS CHAPTER INTRODUCTION 1.1 Background of study 1.2 Objectives 1.3 Research questions 1.4 Significant of the study 1.5 Objects and Scope of study 1.6 Structure of paper Chapter summary CHAPTER THEORETICAL FRAMEWORK AND LITTERATURE REVIEW 2.1 Theoretical framework 2.1.1 The concept of liquidity 2.1.2 Liquidity positions 10 2.1.3 Liquidity risk 11 2.1.4 Liquidity risk management in Vietnam’s banks 13 2.2 Measurement of liquidity 14 2.3 Specific factors affecting commercial banks’ liquidity 19 2.3.1 External factors 19 2.3.2 Internal factors 20 2.4 Literature review 25 v Chapter summary 31 CHAPTER DATA AND METHODOLOGIES 32 3.1 Data collection methods and techniques 32 3.2 Research Models 33 3.3 Data analysis methods and techniques: 39 Chapter summary 44 CHAPTER EMPIRICAL RESULTS AND DISCUSSIONS 45 4.1 Descriptive statistics and correlation coefficient matrix 45 4.2 Regression results 49 Chapter summary 60 CHAPTER CONCLUSION AND MANAGEMENT INTERPRETATION 61 5.1 Conclusion 61 5.2 Recommendations 63 5.3 Limitations 66 Chapter summary 66 REFERENCE 67 APPENDIX 72 vi LIST OF ABBREVIATIONS Abbreviation Explanation SBV State Bank of Vietnam NPL Non-performing loan ATM Automatic Teller Machine SOCB State-Owned Commercial Bank PJSCB Private Joint-Stock Commercial Bank CB Commercial Bank Obs: Observations Std Dev Standard deviation OLS Ordinary Least Squared REM Random Effects Model FEM Fixed Effects Model ROE Returns On Equity vii LIST OF FIGURE AND TABLES Figure 1: Specific factors affecting commercial banks’ liquidity 24 Table Summary of variables in the research model 38 Table The results of the descriptive statistics of the variables in the research model 45 Table Matrix of correlation coefficients between research variables 47 Table 4: Test of variance exaggeration factor VIF 48 Table 5: Regression results of research model LIQ 49 Table 6: Check the autocorrelation test for OLS model 53 Table Breusch and Pagan Largrangian test to check the heteroskedasticity and choose OLS or REM 53 Table Hausman test to select REM or FEM 54 Table Regression results by using REM method 55 Table 10: Summary of research results 57 Table 11 Liquidity reserves of commercial banks 61 CHAPTER INTRODUCTION 1.1 Background of study In banking operations, while influencing factors such as credit risk, exchange rate, interest rate, often have a certain lag, bank liquidity is instantaneous, very rarely at a time In banks, the total demand for liquidity is equal to the total supply of liquidity Therefore, regularly dealing with a liquidity deficit or surplus is always a constant factor at commercial banks If the lack of capital is available for a long time, slow remediation may damage the bank's reputation in the market, reducing its ability to raise capital and profitability And more serious when the bank has to face the situation where depositors conduct massive withdrawals in the system without the amount of available capital being guaranteed; this can push commercial banks to the brink of bankruptcy, be sold or merged and can eventually lead to the collapse of a country's banking and financial system Liquidity is a vital factor determining the safety of any credit institution Any bank is subject to liquidity risk Therefore, measuring and ensuring liquidity is an important and necessary issue that managers must always grasp to make appropriate adjustments to each period of the bank In addition, not only bank administrators must grasp liquidity risk, but the State Bank's authorities must also grasp to adjust through the issuance of policies to stabilize liquidity of the entire banking system From the reality of the global financial crisis in 2008, many economic experts believe that the cause of the crisis is the weakness of the financial system, the main point being the lack of liquidity of commercial banks Many commercial banks, even though their business is profitable, can still face difficulties in managing assets and capital effectively, leading to a liquidity crisis Along with the above statement, according to the Basel Committee on Banking Supervision (BCBS, 2008), the root cause of the financial crisis is the liquidity issue of commercial banks that has not been paid enough attention in recent years and then later The financial crisis itself has the opposite effect on bank liquidity The crisis showed that banks that relied heavily on short-term money markets to finance their operating assets tended to suffer from huge liquidity problems Since the above crisis, most commercial banks have paid attention to the issue of liquidity because it is a vital issue of banks in the current period In Vietnam, over the past two decades, since the Vietnamese banking system implemented the reform process, commercial banks have made a new development in both quantity and quality, but the issue of liquidity does not seem to be concerned The main purpose of this study is to determine the influence of specific factors on the liquidity of commercial banks in Vietnam over 10 years, starting from 2011 to 2020 Dependency is investigated as liquidity (LIQ) The independent variables include equity utilization efficiency, equity ratio, bad debt, profitability, bank size, debt-to-deposit ratio, inflation rate, economic growth The selection of these 10 years was based on the explosive growth of the banking sector in the country and the availability of adequate data for that period The study focuses on specific factors affecting the liquidity of banks In this study, the research scope is all 27 commercial banks listed on the Vietnam stock exchange in the 10 years from 2011 to 2020 The research paper has applied the disclosure approach by using a set of tables Research data design to achieve the set goals The data were analyzed using multiple linear regression models to show the influence of specific factors on the liquidity of commercial banks during that research period Findings are 70 Naceur, S B., & Kandil, M (2009) The impact of capital requirements on banks’ cost of intermediation and performance: The case of Egypt Journal of Economics and Business, 61(1), 70-89 Nikolaou, K., & Drehmann, M (2009) Funding liquidity risk: Definition and measurement (1024) Pasiouras, F., & Kosmidou, K (2007) Factors influencing the profitability of domestic and foreign commercial banks in the European Union Research in International Business and Finance, 21(2), 222-237 Perry, P (1992) Do banks gain or lose from inflation? 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Multicollinearity test Source: Processing research data by using Stata 14.0 Appendix White’s test for heteroscedasticity 75 Source: Processing research data by using Stata 14.0 Appendix Wooldridge test for autocorrelation Source: Processing research data by using Stata 14.0 76 Appendix FEM Regression Result Source: Processing research data by using Stata 14.0 77 Appendix REM Regression Result Source: Processing research data by using Stata 14.0 78 Appendix Hausman test Source: Processing research data by using Stata 14.0 Appendix 10 Breusch and Pagan Largrangian test 79 Source: Processing research data by using Stata 14.0 Appendix 11 VIF - Collinearity Test for REM model Source: Processing research data by using Stata 14.0 80 Appendix 12 List of joint stock commercial banks in Vietnam in the sample No Stock code Banks’ name ABB An Binh Commercial Joint Stock Bank ACB Asia Commercial Bank AGRIBANK Vietnam Bank for Agriculture and Rural Development BAB Bac A Commercial Joint Stock Bank BVB Viet Capital Commercial Joint Stock Bank BID CTG Vietnam Joint Stock Commercial Bank for Industry and Trade EIB Vietnam Commercial Joint Stock Export Import Bank HDB Ho Chi Minh City Development Joint Stock Commercial Bank 10 KLB Kien Long Commercial Joint Stock Bank 11 LPB LienViet Post Joint Stock Commercial Bank 12 MBB Military Commercial Joint Stock Bank 13 MSB Vietnam Maritime Commercial Join Stock Bank Joint Stock Commercial Bank For Investment And Development Of Vietnam 81 14 NAB Nam A Commercial Joint Stock Bank 15 NVB National Citizen Commercial Bank 16 SCB Saigon Commercial Joint Stock Bank 17 SSB Southeast Asia Commercial Joint Stock Bank 18 SGB Saigon Bank For Industry And Trade 19 SHB Saigon Hanoi Commercial Joint Stock Bank 20 STB Sai Gon Thuong Tin Commercial Joint Stock Bank 21 TCB Vietnam Technological and Commercial Joint Stock Bank 22 TPB Tien Phong Commercial Joint Stock Bank 23 VCB Bank for Foreign Trade of Vietnam 24 VIB Vietnam International Commercial Joint Stock Bank 25 VIETABANK Vietnam Asia Commercial Joint Stock Bank 26 VBB Vietnam Thuong Tin Commercial Joint Stock Bank 27 VPB Vietnam Prosperity Joint Stock Commercial Bank Source: Synthesizing from VietStockFinance 82 Appendix 13 Liquidity reserve of Vietnam commercial banks period 2011 – 2020 (unit: %) Bank name 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ABB 22.22 19.46 14.64 4.61 4.93 2.93 4.85 6.60 8.42 10.20 ACB 21.83 31.65 15.55 4.60 3.55 4.36 4.27 3.40 5.80 6.73 AGRIBANK 8.13 7.74 3.35 3.54 3.52 3.52 3.06 0.00 4.26 0.00 BAB 0.00 10.63 2.77 1.94 1.77 1.78 0.85 11.94 11.24 11.71 BID 4.42 3.18 6.25 6.91 6.42 6.36 4.67 7.09 7.03 CTG 13.46 14.23 4.76 10.82 10.86 8.91 10.14 9.85 11.45 10.59 EIB 29.39 39.13 29.12 18.72 21.78 7.91 8.01 11.73 13.83 17.00 HDB 27.19 23.11 9.82 7.68 10.79 7.75 11.72 11.18 15.18 11.27 KLB 14.57 23.91 14.96 7.32 12.21 7.42 11.13 12.32 13.99 20.69 LPB 15.30 35.63 13.93 13.54 6.28 4.79 6.16 7.23 3.35 5.18 MBB 31.49 30.23 10.94 4.41 6.15 8.60 5.62 12.94 10.24 7.70 MSB 27.13 25.97 17.23 5.90 4.75 4.80 6.40 8.58 14.36 13.41 NAB 21.45 21.07 13.96 18.58 27.26 16.78 7.09 9.47 13.76 13.24 NVB 24.44 15.23 1.14 15.53 11.89 13.11 13.69 12.54 9.59 18.19 SCB 12.62 3.27 5.75 6.06 5.80 6.41 4.94 6.31 3.50 6.00 3.88 83 SSB 24.99 41.83 45.51 16.50 18.85 11.55 11.09 12.72 12.38 16.15 SGB 12.66 SHB 23.20 27.15 18.43 12.65 14.97 13.61 10.19 10.25 9.65 9.66 STB 22.15 14.49 8.33 5.71 4.06 3.01 2.48 3.57 2.67 4.63 TCB 34.03 26.76 14.28 8.90 7.00 5.33 5.11 6.89 8.34 11.32 TPB 15.80 33.33 12.96 15.59 18.83 24.18 18.86 18.83 12.49 12.72 VCB 27.54 21.06 15.96 19.16 16.85 14.99 14.33 16.34 18.63 16.67 VIB 27.95 29.39 10.98 9.10 4.55 1.70 19.33 13.41 12.32 5.72 6.82 11.05 16.75 18.04 21.86 15.55 VBB 29.60 30.69 15.71 8.65 16.37 12.98 8.68 10.14 11.94 10.69 BVB 34.17 28.32 19.53 19.97 12.61 11.53 5.98 13.00 14.44 15.37 VPB 19.99 28.47 17.65 4.01 2.24 5.34 2.54 6.41 22.62 13.27 9.60 9.71 8.50 8.04 10.41 10.54 11.37 10.72 Min 4.42 1.14 1.94 1.77 1.70 0.85 Max 34.17 41.83 45.51 19.97 27.26 24.18 18.86 18.83 21.86 20.69 VIET A BANK Average 8.33 3.18 4.81 3.34 2.02 8.80 10.94 15.10 11.94 20.36 8.94 8.45 3.40 6.34 5.32 2.67 2.19 4.76 2.19 Source: Synthesizing from VietstockFinance, annual reports of commercial banks and processing data in Excel 84 ... terms of analytical methods, to analyze the liquidity of the banking system and identify the factors affecting the liquidity as well as propose a model of the factors affecting the liquidity of banks. .. 2009-2015 The results show that the higher the foreign ownership ratio, the higher the liquidity risk, the lower the amount of capital of commercial banks, and vice versa The results of the study... level of accuracy of the study In terms of practical significance, the research results will show the group of factors affecting the liquidity of Vietnamese commercial banks and the degree of influence