1144 factors affecting the liquidity risk of joint stock commercial banks on stock exchanges in viet nam bachelor luận văn TCNH nguyen thu ngan supervisor

MINISTRY OF EDUCATION AND TRAINING

STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

NGUYEN THU NGÂN

FACTORS AFFECTING THE LIQUIDITY RISK OF
JOINT STOCK COMMERCIAL BANKS ON STOCK
EXCHANGES IN VIETNAM

GRADUATION DISSERTATION
SPECIALIZED: BANKING AND
FINANCE CODE: 52340201

HO CHI MINH CITY, JANUARY 2020


BANKING UNIVERSITY OF HO CHI MINH CITY

NGUYEN THU NGÂN

FACTORS AFFECTING THE LIQUIDITY RISK OF
JOINT STOCK COMMERCIAL BANKS ON STOCK
EXCHANGES IN VIETNAM

GRADUATION DISSERTATION
SPECIALIZED: BANKING AND
FINANCE CODE: 52340201

INSTRUCTOR:
ASSOC. PROF., PH.D Ð NG VĂN DÂN

HO CHI MINH CITY, JANUARY 2020


i

ABSTRACT
Liquidity problems are re-emphasised as Vietnamese commercial banks are
making an effort in deploying Basel II for hoping a greater stability and decrease
the likelihood of repeating the financial crisis events in 2007. Therefore, the aim of
this research is to identify factors that affect liquidity risk of 17 Joint-stock
commercial banks listed on stock exchanges in Vietnam and the data covers the
period from 2010 to 2018. Multivariate regression models (Pooled-OLS, FEM,
REM) were used to test the effects and levels of determinants; and after being
selected by F-test and Hausman test, REM was the most appropriate. However,
REM had heteroscedasticity in variance of error and plus, autocorrelation in the
dataset. Therefore, FGLS regression model is used to fix autocorrelation and
unconstant variance of error to ensure a consistent and effective estimation.
The result reveals that from 2010 to 2018, size of the bank and the ratio of
equity to total assets have positive effects on liquidity risk and this can be explained
by the famous “too big to fail” theory that big banks are seemed to secure against
liquidity risk exposure not by holding high liquidity, but by assistance from
interbank market or Lender of Last Resort (Vodova, 2013); plus, equity is
considered as one of the last defense, a shield that against many kinds of risk. If
banks see themselves as “big banks”, their motivation to hold liquidity is limited.
Besides, the relation between liquidity risk and return on equity, non-performing
loan ratio and provision credit losses ratio is ambiguous.
From the result obtained, the study proposes conclusions and a number of

recommendations to banks themselves to increase the efficiency and improve the
liquidity of Vietnamese commercial banks, as well as to the Governement on the
management of the banking system in the coming period.


SUMMARY
In recent year, along with the emergence of globalization and free trade,
economic individuals have created an environment of growth and competition.
Financial markets are no exception, particularly the commercial banks –
intermediaries that connect individuals, companies and other institutions together,
keep the economy going. In addition to competition from domestic financial
institutions, banks also face foreign financial ones which enter Vietnam gradually.
Banking industry is obviously one of the most sentimental activities not just in
Vietnam but worldwide and plays an extremely important role in economic
development. Banks not only influence but also promote the integration of
economic activities such as resource mobilization, development

activities,

allocation of public finance and even social welfare distribution. The administration
of banking is therefore always a matter of particular concern for the government to
carry out its management and supervisory activities. Banks need to adapt, thrive and
evolve effectively to survive in harsh environments, if they do not, they will be
eliminated. With a default of one bank, it could lead to the collapse of the entire
financial and economic system due to its interconnectability. Global financial crisis
that happened in 2007 could be a typical example of the banks’ strong influence on
the economy that led to a series of bankruptcy, pushing the economic stagnation to
its peak.
Besides, the stock market in Vietnam is still quite young, the financial system is
not really healthy and open, creating difficulties and barriers for banking activities.

Thus, as liquidity problems are re-emphasised as Vietnamese commercial banks are
making an effort in deploying Basel II for hoping a greater stability and decrease
the likelihood of repeating the financial crisis events in 2007. Moreover, after
joining the ASEAN Economic Community in 2015, Vietnam has committed itself
to alleviating restrictions in the banking sector, giving this sector many
oppoturnities; but also many challenges such as competitive pressure from regional


banks and international banks, in particular with regard to the limited financial
potential of Vietnam compared to other banks in other countries.
Therefore, the aim of this research is to identify factors that affect liquidity risk
of Joint-stock commercial banks listed on stock exchanges in Vietnam. If the banks
have strong liquidity, this not only helps to stabilize the financial market but also
helps to grow the economy in Vietnam. Thus, to determine and evaluate the level of
impact of these determinants and give conclusions and recommendation from the
obtained results.
This research systematized the theoretical framework including theory
definitions and liquidity risk impacts to the customers, the bank itself and the
economy; and then evaluated the factors affecting liquidity risk in Vietnamese
commercial banks and give empirical evidence based on previous studies. There are
two basic types of determinants of liquidity risk which are objective factors and
subjective factors. However, due to limited time, the author only focused on
subjective factors without considering the affect of factors on “market” level and
government policies on bank liquidity. Model of this research is based on Vodova
(2011) and Trương Quang Thông (2013) panel data regression models as follows:
𝐿𝐿 i = 𝐿0 + 𝐿1𝐿𝐿𝐿 i + 𝐿2𝐿 𝐿𝐿 i + 𝐿3𝐿𝐿 𝐿 i + 𝐿4𝐿𝐿𝐿𝐿𝐿𝐿 i + 𝐿5𝐿𝐿 𝐿 i +
si
In which, LR is liquidity risk as a dependent variable; ETA, NPL, ROE,
LnSIZE, PCL is ratio of equity to assets, non-performing loan ratio, return on
equity, size of the bank, provision for credit losses respectively as independent

variables; s is error term; 𝐿 is the 17 joint-stock commercial banks according to the
list on the Government’s website; i is the year from 2010 to 2018. The data was
collected from financial statements of 17 Join-stock commercial banks that listed on
stock exchanges in Vietnam. The estimated effects have also been presented with a
positive correlation between LR and ROE, LnSIZE, PCL and a negative correlation
between LR and ETA, NPL.


Stata software was then used to describe statistically the dataset and test the
correlation matrix between variables and the result was that ETA has a negative
correlation with LR, whereas ROE and LnSIZE has a positive correlation with LR.
Multivariate regression models (Pooled-OLS, FEM, REM) were used to test the
effects and levels of determinants; and after being selected by F-test and Hausman
test, REM was the most appropriate. Although REM did not have multi-collinearity
phenomenon, it still had heteroscedasticity in variance of error and plus,
autocorrelation in the dataset. Therefore, FGLS was used to fix autocorrelation and
unconstant variance of error to ensure a consistent and effective estimation. The
result is as follows:
𝐿𝐿 i = −0.8455 + 0.7145 𝐿𝐿𝐿 i + 0.0712 𝐿𝐿𝐿𝐿𝐿𝐿i + si
Due to the characteristics of FGLS, the R 2 value does not count as meaningful
when it comes to measure the suitability of the model, however, it can be used to
calculate statistical values as above. Whereby, both ETA and LnSIZE has positive
effects on LR. Firstly, the higher bank’s size, the higher liquidity risk exposure
which is consistent with hypothesis H4. This result can be explained by the “Too big
to fail” theory as big banks are seemed to secure against liquidity risk exposure not
by holding high liquidity, but by assistance from interbank market or Lender of Last
Resort (Vodova, 2013). Secondly, there is a strong positive effect of the ratio of
equity-to-assets to liquidity risk meaning when the ratio of equity-to-assets
decreases, liquidity risk will decrease as well. This result is inconsistent with
hypothesis H1, but suprisingly consistent with the result on the influence of the

bank’s size on liquidity risk. Equity is considered as one of the last defense, a shield
that against many kinds of risk. If banks see themselves as “big banks”, their
motivation to hold liquidity is limited. This result is in line with the result of
Trương Quang Thông (2013). However, the relation between liquidity risk and
return on equity, non-performing loan ratio and provision credit losses ratio is
ambiguous.


From the result obtained, the study proposes a number of conclusions and
recommendations to increase the efficiency and improve the liquidity

of

Vietnamese commercial banks in the coming period.
Particularly, due to banks’ reliance too much on the Gorvernment, the
Government has enacted the Law Amendments to some articles of the Law on
Credit Institutions (Law No. 17/2017/QH14), is effective from January 15, 2018
that banks can be able to go bankrupt if they are poorly operating and are put under
special control by the Government, which has changed entire situation. Therefore,
banks need to rely more on themselves than on passive strategies as they used to,
which is why the author then gave some recommendations to banks themselves to
improve their liquidity and operational management, as well as some
recommendations to the Governement on the management of the banking system. In
particular, banks need to strengthen internal control system, ensure capital
mobilization, prepare specific plans for upcoming risk cases from the best to the
worst. The Government needs to their leadership role for banks, inspect and control
banking activities effectively, improve the organizational structure and apply
effectively the Basel’s principles on managing liquidity.
However, there still exists some limits of this research such as: this research is
only conducted on join-stock commercial banks, not the whole banking system in

Vietnam; the author only used one measurement to measure liquidity of the bank;
the result of FGLS model can not be given out R-squared value to measure the
suitability of the model; this study only conducted internal determinants. Therefore,
the author hopes to study further to provide a more general measurement of
liquidity risk, plus to build a better model to make it a more useful reference for
students’ extensive researches.


ASSURANCE LETTER
I assure that the “factors affecting liquidity risk of joint-stock commercial banks
on stock exchanges in Vietnam” dissertation is my own report. The figures and
sources of information in this research are derived clearly and honestly from the
banks' consolidated financial statements. In addition, the tests were conducted
publicly and transparently with no intervention to correct the results of regression
models, in which there are no previously published content or content made by
others except for full citations in the report.

Author

Nguy n Thu Ng n


THANK YOU LETTER
I would like to thank the teachers and friends in the Banking University in Ho
Chi Minh city; and with the deepest gratitude, I would like to send to the personnel
in the Department of Finance and Department of Banking the most sincere thanks
for the knowledge and dedication, who has devoted to us during our school time.
Especially in the program of implementing the graduation dissertation with the
guidance of Association Professor and Doctor of Philosophy Ð ng Văn Dân, I have
been helped a lot in choosing the topic, writing the research, as well as in-depth

guidance in how to work properly.
Finally, I would like to thank my family, friends and relatives who have always
been there to support and encourage me to complete my graduation dissertation.
I sincerely thank!


INDEX
ABSTRACT......................................................................................................... i
SUMMARY......................................................................................................... ii
ASSURANCE LETTER..................................................................................... vi
THANK YOU LETTER.................................................................................... vii
INDEX.............................................................................................................. viii
LIST OF ACRONYMS..................................................................................... xii
LIST OF TABLES............................................................................................ xiii
LIST OF GRAPHS........................................................................................... xiv
CHAPTER 1 INTRODUCTION....................................................................... 1
1.1

Introduction........................................................................................... 1

1.2

Previous studies..................................................................................... 2

1.3

Research objectives............................................................................... 4

1.4

Research questions................................................................................ 4

1.5

Research subjects and scope.................................................................. 5

1.5.1

Research subjects............................................................................ 5

1.5.2

Research scope................................................................................ 5

1.6

Methodology......................................................................................... 5

1.7

Contribution of the study....................................................................... 6

1.8

Dissertation structure............................................................................. 6

CHAPTER 2 THEORETICAL FRAMEWORK............................................... 8
2.1

Theory of liquidity risk of join-stock commercial banks.......................8

2.1.1

Joint stock Commercial banks........................................................ 8

2.1.2

Bank liquidity risk.......................................................................... 8


2.1.3
2.2

Liquidity risk impacts................................................................... 10

Previous studies on factors affecting liquidity risk of joint-stock

commercial banks................................................................................................ 11
2.2.1

External factors............................................................................. 11

2.2.2

Internal factors.............................................................................. 12

SUMMARY OF CHAPTER 2....................................................................... 16
CHAPTER 3 RESEARCH MODEL............................................................... 17
3.1

Dataset................................................................................................. 17

3.2

Analysis process.................................................................................. 17

3.3

Research model and hypothesis........................................................... 19

3.3.1

Dependent variable....................................................................... 20

3.3.2

Independent variables................................................................... 21

SUMMARY OF CHAPTER 3....................................................................... 24
CHAPTER 4 RESEARCH RESULTS............................................................. 25
4.1

Descriptive statistics............................................................................ 25

4.2

Correlation analysis of variables.......................................................... 26

4.3

Regression analysis............................................................................. 28

4.4

Defect tests.......................................................................................... 30

4.4.1

Multi-collinearity test.................................................................... 30

4.4.2

Homoskedasticity test................................................................... 31

4.4.3

Autocorrelation test....................................................................... 32

4.5

Final model.......................................................................................... 33

4.6

Summary............................................................................................. 35

SUMMARY OF CHAPTER 4....................................................................... 36


CHAPTER 5 CONCLUSION AND RECOMMENDATION......................... 37

5.1

Conclusion........................................................................................... 37

5.2

Recommendation................................................................................. 38

5.2.1

For commercial banks................................................................... 39

5.2.2

For the Government...................................................................... 42

5.3

Limits and extensive researches.......................................................... 43

5.3.1

Limits of the research................................................................... 43

5.3.2

Direction for extensive research.................................................... 44

SUMMARY OF CHAPTER 5....................................................................... 45
SUMMARY....................................................................................................... 47

REFERENCE....................................................................................................... i
APPENDIX......................................................................................................... iv
A. Joint-stock Commercial Banks list.......................................................... iv
B. Calculated dataset.................................................................................... vi
C. Regression results with Stata 13............................................................... x
C.1

Panel data description........................................................................ x

C.2

Variables statistics.............................................................................. x

C.3

Variables correlation........................................................................... x

C.4

Pooled-OLS regression..................................................................... xi

C.5

FEM regression................................................................................. xi

C.6

REM regression............................................................................... xii

C.7

Pooled-OLS, FEM, REM regression................................................ xii

C.8

Hausman test................................................................................... xiii

C.9

Multi-collinearity test...................................................................... xiv


C.10

Homoskedasticity test.................................................................. xiv

C.11

Autocorrelation test....................................................................... xv

C.12

FGLS regression........................................................................... xv

C.13

FGLS regression after excluding ineffective variables................xvi


LIST OF ACRONYMS

Acronyms

Description

ASEAN

Association of Southeast Asian Nations

BLUE

Best Linear Unbiased Estimation

FEM

Fixed Effect Model

FGLS

Feasible Generalised Least Squares

GDP

Gross Domestic Product

HNX

Hanoi Stock Exchange

HOSE

Ho Chi Minh Stock Exchange

JSCB

Joint Stock Commercial Bank

JSCBs

Joint Stock Commercial Banks

NHTMCP

Ngân h ng thương m i c ph n

Pooled-OLS

Pooled Ordinary Least Square

REM

Random Effect Model

SBV

State Bank of Vietnam

TBTF

Too big to fail / Too big to fall

UPCoM

Unlisted Public Company Market

VAMC

Vietnam Asset Management Company


LIST OF TABLES
Table 2.1 Summary of previous research results................................................ 12
Table 3.1 Variables description.......................................................................... 19
Table 3.2 Estimated effects................................................................................ 21
Table 4.1 Variable statistics................................................................................ 25
Table 4.2 Variables correlation........................................................................... 27
Table 4.3 Regression results of Pooled-OLS, FEM, REM................................. 28
Table 4.4 F-test................................................................................................... 30
Table 4.5 Hausman test...................................................................................... 30
Table 4.6 Multi-collinearity test......................................................................... 31
Table 4.7 Homoskedasticity test......................................................................... 32
Table 4.8 Autocorrelation test............................................................................ 32
Table 4.9 Regression result of FGLS................................................................. 33
Table 4.10 Regression result of FGLS after excluding ineffective variables......34


LIST OF GRAPHS
Graph 3.1 Analysis process................................................................................ 17
Graph 3.2 Data collection process...................................................................... 18

1

CHAPTER 1

INTRODUCTION

1.1 Introduction
Banking is one of the most sentitive industries not only in Vietnam but also
throughout the world and it plays an extremely important role in economic
development. Banks do not only affect but also facilitate the integration of
economic activities such as mobilizing resources, production activities, public
finance distribution and even distribution of social welfare. Therefore, banking
management is always a matter of special concern by government carrying out
management and supervision activities.
A typical example of the banks’ heavy influence on economy is the global
financial crisis that happened in 2007 which led to a series of bankruptcies, bringing
the economic stagnation to its peak. According to Bank for International
Settlements, during global financial crisis, many banks struggled to sustain adequate
liquidity, a number of banks still failed, being forced into mergers even when
receiving extraordinary support from the central banks. Several years before the
crisis, liquidity and its management was not really a priority, funding was available
at low cost. However, this crisis has totally changed market conditions that captured
the importance of related liquidity issues measurement thus its management.
It is evident that liquidity risk measurement is up-to-date and is playing an
important role, which is why Basel III has been officially introduced since 2013,
putting a considerable effort into the design of banking regulation as a way of
reducing the damage to the economy by banks. Many financial market participants
including Vietnam are still struggling to deploy Basel II for hoping a greater
stability and decrease the likelihood of a repeat of the events in 2007. In addition to
this, after joining the ASEAN Economic Community in 2015, Vietnam has

committed to ease restrictions in the banking industry, giving this sector many
opportunities such as increasing the level of economic integration, increasing the
opportunities to access and attract capital, etc. but also many challenges such as


competitive pressure from regional banks and international banks, especially in the
context of our country's limited financial potential compared to other banks in other
countries.
Therefore, the study of liquidity issues in the banking system is extremely
necessary, if the banks have good liquidity, it does not only help stabilizing
financial market but also developing the country's economy. Especially, in the
current conditions of Vietnam, liquidity issues are of one of the most concern and
are often discussed from the beginning of every year. Those are the reasons for the
author to chose to study on the topic "Factors affecting the liquidity risk of joint
stock commercial banks listed on stock exchanges in Vietnam".
1.2 Previous studies
Aspachs et al (2005) provided a comprehensive analysis of factors that affect
liquidity policy of banks in United Kingdom. In particular, they investigated how
central bank’s policy affected liquidity buffers and how the economic cycle changed
the liquidity buffers. The result was that monetary policy rates affected negatively
on UK banks’ amount of liquid assets which meant when central banks attempted to
reduce the interest rate and increase the monetary base, banks seemed to keep the
additional liquidity on their balance sheets. Secondly, banks appeared to increase
their liquidity buffers while economic downturn and drop them down in economic
upturn. This study used unconsolidated financial reports on a quarterly basis from
1985 to 2003.
Praet and Herzberg (2008) indicated the complex relationship between banks
and financial markets, in which banks are dependent on and exposed to financial
markets as regards liquidity. The authors investigated the mechanics of liquidity
crisis in the market and its impact on bank’s liquidity, as well as spillovers to other

banks. The result was that asset liquidity considerably rely on functioning of
financial markets, especially for secured lending transactions and securitization
market. They also found that low interest rates have accelerated liquidity in the


market beyond sustainable level. Together with liquidity management, they also
realized that a greater transparency could reduce asymmetric information which
reduces market vulnerability. However, information appears to be limited that a
comprehensive and comparable information gaps were large in 2007 when the
financial crisis took place.
Vodova (2011) focused on the causes of liquidity risk that she identified
determinants of liquidity in Czech commerical banks from 2001 to 2009 with
liquidity measured by different balance sheet indices. The result revealed that there
is a positive connection between liquidity and capital adequacy as well as ratio of
non-performing loans and interest rate on loans. However, the connection between
size of banks and liquidity is unclear. Vodova also found that larger banks present
lower liquidity according to the “too big to fall” theory, that larger banks are less
motivated to hold liquidity as they rely more on government supports when in
shortages.
Vodova (2013) used 3 formulas to evaluate liquidity positions of Hungarian
commerical banks from 2001 to 2010: (1) liquid assets-to-total assets ratio gives us
a general look on liquidity shock absorption capacity; (2) liquid assets-to-deposits
and short-term borrowing ratio focuses on sensitivity to selected funding types; (3)
liquid assets-to-deposits ratio captures bank’s liquidity when bank cannot borrow in
interbank market when they need to. The result was liquidity of banks was related
positively to capital adequacy, interest rate of loans, profitability whereas it was
related negatively to the bank’s size, interest margin, interest rate of monetary
policy, interest rate on interbank market transactions. The impact of the growth rate
of GDP on liquidity was unclear.
Trương Quang Thông (2013) used Financing Gap formula to evaluate

liquidity risk in 27 Vietnamese commercial banks from 2002 to 2011. Plus, he
divided two determinants into two groups: internal and external variables. He found
out that increasing the size of banks would eventually increase liquidity risk, the
increase of


the ratio of liquid reserve to total assets will reduce liquidity risk, whereas the
decrease of the ratio of bank loans and other loans to total capital also helps banks
reduce liquidity risk. Thus, he found a negative correlation between liquidity risk
and the ratio of equity to total assets, as higher the bank’s equity, the higher
liquidity risk exposure. In addition, the result also showed the impact of the growth
rate of GDP and inflation rate on liquidity risk.
Vũ Thị Hong (2015) researched on determinants of liquidity of 37 commercial
banks in Vietnam from 2006 to 2011. The study was based on Vodova (2011)’s
liquidity measurements as having two liquid indices and two illiquid indices; and
was also based on Basel’s principles on liquidity management to build a set of
factors as independent variables. The result highlights that the liquidity of banks is
higher when equity ratio, non-performing loan ratio and net income is higher.
Meanwhile, liquidity is negatively liked with loans-to-deposits ratio. Furthermore,
the relationship between liquidity and size of the bank, provision credit losses ratio
is unknown.
1.3 Research objectives
-

Identify factors affecting liquidity risk of joint-stock commercial banks
(JSCBs) based on theoretical basis and reference models;

-

Determine the level of impact (strong or weak, negative or positive) of these

factors on liquidity risk of banks;

-

Evaluate the impact of these factors, give conclusions and recommendations.

1.4 Research questions
-

What are the factors affecting liquidity risk of JSCBs?

-

What is the level of impact of factors on liquidity risk of banks?

-

What conclusions can be drawn from the evaluation results?