Economic doctoral thesis: The impact of bank competition to financial stability of Vietnam commercial bank

MINISTRY OF EDUCATION

STATE BANK OF VIETNAM

BANKING UNIVERSITY, HO CHI MINH CITY

NGUYEN LUU TUYEN

THE IMPACT OF BANK COMPETITION TO
FINANCIAL STABILITY OF VIETNAM
COMMERCIAL BANK

DOCTOR OF PHILOSOPHY IN ECONOMICS
THESIS SUMMARY
Major: Finance – Banking
Code : 62.34.02.01
Instructors:

Doctor. Lam Thi Hong Hoa
Doctor. Le Ho An Chau

HO CHI MINH CITY - 2018


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CHAPTER 1: GENERAL INTRODUCTION
1.1. Practical context and reasons for choosing the topic
Improving domestic and international competitiveness while ensuring the
financial stability of the commercial banking system in Vietnam is one of the
important objectives of Vietnam's banking and finance industry during 2011 - 2016.

Over the past few years, the mergers, acquisitions and restructuring of banks'
operations have been extremely active, under the scheme "Restructuring Credit
Institutions (CIs) in 2011-2015" approved by the Prime Minister on 01/03/2012,
with priority given to weak credit institutions; to carry out the merger, consolidation
and acquisition of CIs on the principle of voluntariness; to increase chartered capital
and handle bad debts of credit institutions and step by step restructure operation,
management and administration. This resulted in a reduction in the number of banks
in the system when weak banks were forced to merge. The mergers and acquisitions
of commercial banks also raised concerns about the possibility of a decline in the
competitiveness of the banking industry and the impact on the financial stability of
Vietnam commercial banks.
In the context of Vietnam joining the ASEAN Economic Community (AEC)
by 2015, or the signing of important FTAs between Vietnam / ASEAN with India,
Japan, South Korea , Australia & New Zealand, Chile, Eurasia, the trend as well as
the requirement to improve the competitiveness of commercial banks in Vietnam
and ensure the financial stability of commercial banks is one of the Important
factors support this process.
Trends and requirements to improve competition and financial stability of
commercial banks are increasingly interested in different markets and is the subject
of many debates.
In recent years there have been several debates regarding the relationship
between competition and the stability of the banking system (Beck, 2008; Carletti,
2008). The debates on this relationship have formed two contradictory views:
"competition-fragility" and "competition-stability". From the standpoint of


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"competition -fragility", increasing bank competition reduces the marketpower,
ank's profit margins and consequently decreases the franchisevalue of the bank

(Berger et al., 2009). This encourages banks to take more risks to seek profits,
causing instability in the banking system (Marcus, 1984; Keeley, 1990; Carletti and
Hartmann, 2003).
In contrast, the "competition – stability" view holds that there is a positive
relationship between banking competition and the stability of the banking system.
Increased competition will lead to the stability of the banking system and vice versa
(Xiaoqing (Maggie) Fu et al., 2014). In a market where competition between banks
is low, it can be more risky when large banks are often considered too important to
fail and thus, when faced with difficulties in operating, those banks usually receive
support from the government (Mishkin, 1999). In addition, in a low-competition
market, large market-power banks will offer higher lending rates, which will cause
difficulties for borrowers in repayment capacity and increase the risk exposure of
the bank (Xiaoqing (Maggie) Fu et al., 2014). In contrast, in a market where
competition among banks is high, lending rates are low; problems of“too-big-to
fail”receiveless attention, and therefore positively impact on the stability of the
banking system (Boyd and De Nicoló, 2005; Beck, 2006; Schaeck, 2006; TurkAriss, 2010).
Studies supporting these two points suggest that the effects of competition on
the stability of the banking system are inconsistent across countries. In addition,
very few studies examine the relationship between competition and stability before
and after the financial crisis (Fu et al, 2014; Boyd and De Nicoló, 2005; Beck,
2006; Schaeck, 2006; Turk-Ariss, 2010).
Therefore this research is necessary to strengthen the practical evidences and
theoretical foundation of the relationship between competition and stability of
Vietnam commercial banks. This study aims to assess the relationship between
competition and stability of the Vietnam commercial banks for updated period from


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2008 - 2016. This study also looks at this relationship in the context of the financial

crisis of 2008 and 2009.
Research results will also provide a basis for policy makers and stakeholders
to better understand the impact of competition on the financial stability of
commercial banks to set out approriate strategies and solutions.

1.2. Research objectives and research questions:
 Research objectives:
The overall objective of the thesis is to study the impact of competition on
the financial stability of Vietnamese commercial banks by examining the
relationship between "competitive - stable" and "competitive - fragile". From the
results of the study, the thesis will discuss the appropriate policy implications.
To achieve the overall goal, the thesis will in turn address three specific
objectives:
•

Measuring the level of competition and analyzing factors affecting the
competition of Vietnamese commercial banks.

•

Measuring financial stability and analysis of factors affecting the financial
stability of Vietnamese commercial banks.

•

Examine the impact of competition on the financial stability of Vietnamese
commercial banks by testing two hypotheses: "competition - stability" and
"competition - fragility".
 Research questions:
To achieve the research objectives, the thesis responds to the following

research questions:
•

What are the level of competition of Vietnam commercial banks in 20082016?

•

What factors affect the level of competition of Vietnam commercial banks?

•

What are the level of financial stability of Vietnam commercial banks in
2008-2016?


4

•

What factors affect the financial stability of Vietnam commercial banks?

•

The impact of competition on financial stability of Vietnam commercial
banks

supports

the

"competition-stability"

or

"competitive-fragility"

hypothesis?

1.3. Research Object and research scope:
•

Research object: The object of the study is the impact of competition on
financial stability of commercial banks. In particular, the degree of
competition represented by the Lener index and the financial stability is
represented by the bank's bankruptcy risk level, Z-score, based on relevant
theoretical background and research.

•

Research scope: Limited in 24 joint stock commercial banks in Vietnam.
The study period is from 2008 to 2016.

1.4. Recearch methodology:
Based on the financial report, annual report, public documents of commercial
banks in Vietnam from 2008 to 2016, the Lerner Competitiveness Index was
calculated according to Abba Lerner's formula (1934) to estimate and compare the
level of competition of Vietnamese commercial banks in the period 2008 - 2016.
Subsequently, the thesis inherited the Z-score calculation method for banks used in
the research of Boyd & Graham (1986 ), Hannan & Hanweck (1988), Boyd & ctg

(1993) to measure the financial stability of Vietnamese commercial banks. The
study then uses models proposed by Raúl Osvaldo Fernández et al (2015) to test the
relationship between competition and financial stability of Vietnamese commercial
banks. To overcome the endogenous phenomena in the model, the thesis utilizes the
tool change technique with the DGMM estimation, seeking evidence of the impact
of competition on the financial stability of Vietnamese commercial banks in normal
conditions and in crisis conditions.


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1.5. Research contribution
The main research contributions include:
Regarding scientific contributions: The thesis will supplement the
empirical evidence on the level of competition and financial stability of Vietnam
commercial banks in the period 2008 - 2016, and evaluate and verify the
relationship of "competition - stability" and "competition - fragility" for Vietnam
commercial banks. This is a new study where most of the current topics are either
focused on evaluation of the competitiveness of Vietnamese commercial banks or
financial stability of Vietnamese commercial banks. In-depth and specific studies
about the quantitative impact of competition on the financial stability of Vietnamese
commercial banks is very limited. In addition, although some studies in the world
have evaluated the impact of competition on financial stability, most of those
researches are for developed countries such as Europe and the Americas. This is a
new and up-to-date research for Vietnam commercial banks in the period of 2008 2016, a representative for a developing country or a frontier market in which the
financial systems are mainly developed based on the banking system.
Regarding practical contributions: The research results will help Vietnam
commercial banks better understand the current status of competition, stability,
impact factors, trends and impacts of competition on financial stability of Vietnam
commercial banks in the period of 2008 - 2016, from which there are strategies and

solutions to enhance competitiveness and ensure financial stability.
At the same time, research results will also help regulators and policy makers
to better assess the level of competition, financial stability and the impact of
competition on financial stability under normal conditions and in the crisis
condition, which helps to establish appropriate regulatory policies to improve the
competitiveness of Vietnamese commercial banks and to help ensure the financial
stability of commercial banks in Vietnam.


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1.6. Thesis structure
The structure of the thesis consists of 5 chapters:
Chapter 1: Research Introduction
Provide an overview of the research topic, including the context and reason
for choosing the topic, research objectives, research questions, subjects and scope of
research, research methodology, research contribution and the research structure.
Chapter 2: Theoretical Background and Empirical Evidences for Banking
Competition, Financial Stability and the Impact of Competition on Financial
Stability
Introduce theories and related research studies that have been developed to
form the research model and to develop research hypotheses.
Chapter 3: Research Methodology and Research Data
Describe the research methodology and descriptive data.
Chapter 4: Empirical Analysis of Banking Competition, Financial Stability
and the Impact of Competition on Financial Stability of Vietnamese Commercial
Banks in the Period 2008 - 2016
Presentation of research results on banking competition, financial stability
and impact of competition on financial stability of Vietnamese commercial banks in
the period of 2008 - 2016.

Chapter 5: Conclusions and Policy Implications
Present the main conclusions of the research


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CHAPTER 2: THEORY BASIS AND IMPERICAL
EVIDENCE OF BANKING COMPETITION, FINANCIAL
STABILITY AND THE IMPACT OF COMPETITION ON
FINANCIAL STABILITY
2.1. Theoretical basis:
2.1.1. Theoretical basis of banking competition
2.1.1.1. Definition:
According to Porter (1998), competition is gaining market share. The
essence of competition is to seek profit, which is higher than the average profit that
an enterprise has. The result of competition is the gradual deepening of profit
margins in the industry, leading to a reduction in the price effect (1980).
Nguyen Thanh Phong (2010) defines the competition of commercial banks
as the ability created by the bank on the basis of maintaining and developing its
inherent advantages in order to consolidate and expand its market share, increase
profits and be able to resist and overcome adverse changes in the business
environment.
In summary, the level competition of commercial banks is the ability of the
bank to create, maintain and develop the advantages to consolidate and expand
market share; increase profits and be able to resist and overcome adverse changes in
the business environment.
2.1.1.2. Measurement Method:
The research on the world using different methods to measure level of bank
competition, including SCP method based on SCP theory: structure - conduct performance) and the non-structure method based on concentration ratios.
 Market structures method

 Non-structure method


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2.1.2. Theory about financial stability of commercial banks
2.1.2.1. Definition of financial stability
According to Buiter (2008), financial stability will be ensured if the
following factors are not present: (i) asset price bubbles; (ii) liquidity shortage; (iii)
The insolvency of financial institutions threatens the stability of the system.
According to the European Central Bank (ECB), financial stability is a state
of financial institutions capable of absorbing shocks, minimizing major breakdowns
that could cause significant harm to the process of allocating investment resources
to more efficient channels. ECB argues that a financial institution is considered
stable if it meets the following criteria: (i) it is possible to allocate effective
resources from the savings channel to the investment channel; (ii) financial risks are
assessed and determined accurately and reasonably for better control; (iii) Can
absorb financial shocks as well as fluctuations in the real economy.
In short, although there is no official definition of the term "financial
stability", on the macro perspective, financial stability is a situation in which the
financial system (financial market , financial institutions, financial infrastructure)
perform its functions smoothly, contributing to the efficient allocation of resources
of the economy. System-level risks are accurately assessed and managed effectively
to avoid possible collapse of the financial system. At the level of commercial banks,
financial stability can be understood as the state in which the organization operates
smoothly, performs its function, operates stably and is able to withstand the shock
from the external environment, and itself does not cause a shock to the economy.
2.1.2.2. Financial stability and financial instability of commercial banks
At present, there is no consensus on an exact definition of the financial
stability of banks. Studies on financial stability of commercial banks often consider

and evaluate the "level of financial instability" as an approach to assessing
"financial stability", and financial instability is the opposite of financial stability.
The financial turmoil of commercial banks is often associated with a general
banking panic that is related to a bank's shock exaggerated by the behavior of


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uninformed depositors, who suspect the bank's asset value is lower than the bank's
liability value, then withdraw the deposits.
When a bank encountered a sudden capital withdrawal by depositors, this
can lead to the bank run and cause instability. Due to the majority of lending bank
deposit should get when experiencing situations of sudden customer withdrawals of
large amounts, the Bank could not immediately refund all the funds sent to the
client.The delay paid due to inability to meet this could lead to a run on deposits
prompted the Bank into bankruptcy status. The result is that the depositors will
suffer damage unless they are the insurance company paid deposits.The fleeing the
Bank spread increase unrest led to the banking crisis system.Many examples of the
bank run took place, such as the fleeing from the US Bank the year 1930, the
collapse of investment bank Bear Stearns in 2008.
When a bank encounters a sudden withdrawal by depositors, this can lead to
bank failure and cause instability. Because banks lend a large amount of their
deposits, banks are unable to immediately repay all deposits to customers when they
encounter unexpected situations where there is money withdrawal in large amounts.
This inability to pay due to the inability to respond can lead to a runaway deposit
that leaves the bank in bankruptcy. As a consequence, depositors will suffer losses
unless they are covered by the insurance company. The widespread bank outbreak
has increased the instability that has led to a systemic banking crisis. Many
examples of bank failures have taken place, such as the failure of the US banks in
the 1930s, the collapse of Bear Stearns investment bank in 2008.

2.1.2.3. Methods to measure financial stability and financial instability
Financial stability of commercial banks is often measured indirectly through
the assessment of financial instability and banking crisis either systematically or
individually.


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(i) Measurement of systematic financial stability and financial instability
In order to measure system financial stability, many studies use aggregate
metrics for the whole system (Z-scores and distance to bankruptcy), with average or
weighted of each rating factor by scale of each bank. The limitation of this approach
is that it does not take into account the interrelationships between financial
institutions, ie the ability to spread as a financial institution
(ii) Measurement of individual financial stability and financial instability
Based on Altman's research, many studies have subsequently applied the Zscore to assess bankruptcy risk in various industries. For the banking sector, there
are studies by Boyd & Graham (1986), Hannan & Hanweck (1988), Soedarmono &
ctg (2011).
The degree of financial stability is quantified by Z-score in the banking
sector studies and is calculated as follows:

𝑅𝑂𝐴𝑖𝑡 is the return on total assets of bank
𝐸𝑄𝑇𝐴𝑖𝑡 is the ratio of equity to total assets of bank
𝛿𝑅𝑂𝐴𝑖𝑝 is the standard deviation of the bank's ROA
2.1.3. Theoretical background of competition and stability of the banking
system
From the traditional viewpoint of a "competition - fragility" relationship, a more
competition or less centralized banking system increase instability. This is
explained by the franchise value theory studied by Marcus (1984) and Keeley

(1990), suggesting that competition motivates banks to pursue more risky strategies.
These studies show thatless competition or a more exclusive monopoly of some
banks will lead to higher franchise value of these banks, and may prevent excessive
risky decisions of the bank's executives. Because when the Franchise value is


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higher, the opportunity cost of bankruptcy is higher, leading to the reluctance of
bank executives and bank shareholders to participate in dangerousdecisions, thereby
improving the quality of bank assets.
Boot and Greenbaum (1993) and Allen and Gale (2000, 2004) show that in a
competition environment, banks receive less information from their relationships
with borrowers, making it difficult to check credit records and increase the risk and
instability.
Boyd et al. (2004) argue that banks with a higher level of presence or higher
monopolies in a centralized banking system can increase profits and thereby reduce
financial breachability by providing "Buffer Capital"to protect the system against
macroeconomic shocks and external liquidity problem.
From a "competition – stability" standpoint, a more competitive or less monopoly
banking system will be more stable, in other words, less competitive or more
monopoly banking system will be more unstable. This can be explained by the "too
big to fail" theory proposed by Mishkin (1999) indicating that policymakers will be
more concerned about the collapse of the bank when there are so few banks in the
banking system. Thus, large banks are more likely to receive government
guarantees or grants, which can create moral hazard problems, encourage dangerous
decisions and increase instability of the banking system. Moreover, the
spreadingrisk may increase in the centralized banking system with large banks.
Caminal and Matutes (2002) argue that less competition can lead to easier credit
granting and larger loans, which increases the probability of bank collapse. Boyd

and De Nicolo (2005) argue that high monopoly banking systems allow banks to
charge higher interest rates, and may encourage borrowers to take greater risks.
Therefore, the amount of non-performing loans can increase, resulting in higher
probability of bank’s bankruptcy. However, Martinez-Miera et al (2010) suggests
that higher lending rates also bring higher interest income to banks. This offset
effect can create a U-shaped relationship between bank competition and stability.


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2.2. Empirical evidences:
2.2.1. Empirical studies on the level of competition and the factors that
influence the level of competition of financial institutions
Competition in the banking sector has been a subject that has attracted the attention
of many domestic and foreign researchers.
Fungacova et al (2010) studied the market power of Russian banks in the period
2001-2007 using the Lerner index.
Demirguc-Kunt and Peria (2010) study market power of the banking system in
Jordan 1994-2006.
Soedarmono et al (2011) studied the competitiveness of commercial banks in Asian
countries and territories for the period 2001-2007.
Bolt and Humphrey (2012) study the competitiveness of US banks, which use HHI,
Lerner and H statistics to measure competition.
Repkova (2012) examines the competitiveness of the Czech banking system for the
period 2000-2010.
Simpasa (2013) examines the level of competition and market structure in the
Zambian banking system in Africa in the context of a dynamic market movement
involving new and emerging foreign banks and privatization of State-owned banks.
Laurent's (2013) study of regional bank competition in Europe, in which the author
examines the degree of competition among EU banks in the period 2000-2010 to

assess the behavior of banks Europe in this period.
Hamza and Kachtouli (2014) examine the level of competition and market power of
Islamic banks and commercial banks in the Middle East & North Africa and
Southeast Asia for the period 2004-2009.
Saibu (2015) studies the competitiveness and concentration of Nigerian banks for
the period 2001 - 2013.
Phan Thi Thom and Than Thi Thu Thuy (2015) study the impact of competition on
the efficiency of cost and profit management of Vietnamese commercial banks in
the period 2005 - 2014.


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Vo Xuan Vinh and Duong Thi Anh Tien (2017) studied the competitiveness and
considered factors affecting the competitiveness of Vietnamese commercial banks
in the period 2005-2014
2.2.2. Empirical studies on financial stability and factors affecting financial
stability of commercial banks
Currently, financial stability and factors affecting the financial stability of
commercial banks are increasingly interested and attracted many research in the
country as well as in the world.
Hesse and Cihak (2007) analyze empirically the role of cooperative banks in
stabilizing finances.
Ivičić and Katt (2008) investigated the impact of macroeconomic variables
and banking characteristics on the payment risk of banks in seven Central and
Eastern European countries from 1996 to 2006.
Soedarmono et al (2011) examined whether Asian banks were morally at risk
in the 1997 Asian crisis.
Rahman et al (2012) studies the relationship between bank ownership and
risk and the impact of government regulation on capital.

Fu et al (2014) examines the relationship between competition and financial
stability, using information and data from 14 Pacific economies from 2003 to 2010
to examine the effects of bank competition, concentration, and regulations of
nations on the fragility of banks which are determined by the bank's probability of
bankruptcy and Z-score.
Chiaramonte et al (2015) evaluates the accuracy of the Z-score, a widely
used representative variable to measure the financial stability of banks, based on the
sample of European banks from 12 countries in the period 2001-2011.
Strobel and Lepetit (2015) use the Z-score model to evaluate and consider
the relationship between Z-score and the bankruptcy probability of banks, which
provide a more refined measurement without pressure to set the next distribution
assumptions.


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Hammami & Boubaker (2015) examines the effect of ownership structure on
bank risk, using information on financial statements of 72 commercial banks from
10 Middle East and North Africa (MENA) countries over 2000 to 2010.
Nguyen Minh Ha and Nguyen Ba Huong (2016) identify the factors that
influence the bankruptcy risk of Vietnamese banks by using the Z-score method,
thus suggesting appropriate policies to enhance stability and health in operation of
joint stock commercial banks in Vietnam.
2.2.3. Empirical evidence of competition and stability of the banking system
There have been a number of studies showing that the higher the level of
bank competition, the more likely it is that financial instability will be mitigated
through a decline in market power, which in turn will reduce profits and lower the
value of the brand. These studies support the "competition - fragility" view. In view
of this, banks are encouraged to take more risks to increase profitability and to
reduce the quality of their loan portfolio (Marcus, 1984, Keeley, 1990 and Carletti

and Hartmaan, 2003).
However, many recent studies have advocated a "competition-stability"
view. Beck et al. (2006) studied a group of 69 countries and found that countries
with low market concentration or high competition were less likely to suffer
financial crisis. Boyd and De Nicolo (2005) argue that the greater the market power,
or the lower the competition in the lending markets, the higher the risk for banks
because higher interest rates make repayments to customers more difficult. This can
exacerbate ethical risk, and at the same time, higher interest rates will attract higher
risk borrowers. In addition, in highly centralized monopolies, financial institutions
may believe that they are "too large to collapse" and this can lead to riskier
investments (Berger et al. , 2008).
Other studies have recently applied the Lerner competitiveness index and
measured bank stability through the Z-score to examine the relationship between
competition and the stability of the banking system such as Berger et al. (2008),
Turk-Ariss (2010), Liu et al. (2010).


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2.3. Evaluating prior studies
2.3.1. Evaluating previous studies on competition and factors affecting the level
of competition of commercial banks
It can be seen that there are a number of different studies with different countries,
using different methods for differential results related to the measurement of
competition and factors affecting the level of competition of commercial banks.
Previous studies have identified a number of factors affecting the level of
competition of commercial banks, including:
 The size of the bank
 Capital size
 Outstanding loans



Profit



cost management effectiveness

2.3.2. Review previous studies on financial stability and factors affecting the
financial stability of commercial banks:
There are many different studies with different countries that use the Z-score to
measure the bank's financial stability, measuring the level of risk exposure to
bankruptcy or financial instability of the bank. The studies yielded different results
related to the issue of measuring financial stability and factors affecting the
financial stability of commercial banks. The results of the study show that Z-score
is a simple and less time-consuming and cost-effective method of measuring
financial stability in the banking sector.
Previous studies have identified a number of factors that affect the financial stability
of commercial banks, including:
 The size of the bank
 Capital size
 Outstanding loans


Profit



cost management effectiveness

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2.3.3. Review previous studies on the impact of competition on financial
stability of commercial banks
There are different studies with different countries, using different methods to
differentiate the relationship between competition and financial stability of
commercial banks. This is the basis for the development of the thesis.
Specifically: the first study of the thesis based on the results of Marcus (1984),
Keeley (1990), Carletti, and Hartmaan (2003) studies suggests that the higher the
level of bank competition, the more likely it is to lead to financial instability, mainly
through the decline of market power, which consequently reduces profits, and
decreases the value of the brand. These studies support the "competition - fragility"
view.
The second research point is based on the findings of Boyd and De Nicolo (2005),
Beck et al. (2006), Turk-Ariss (2010), Liu et al. (2010), suggesting that the higher
the level of bank competition, the more financial stability the banks will be. The
reason is that the greater the market power or the lower the level of bank
competition in lending markets, the higher the risk for the bank, the higher the
interest rate will be and should be more difficult for borrowers to pay. This can
exacerbate ethical risk, and at the same time, higher interest rates will attract higher
risk borrowers. In addition, in highly centralized monopolies, financial institutions
may believe that they are "too large to collapse" and this can lead to riskier
investments (Berger et al. , 2008).
In this study, the author uses the Z-score to represent financial stability and the
Lerner index to represent the level of competition of Vietnamese commercial banks.
The thesis also examines the impact of intrinsic factors within the banks, as well as
external factors in the macro environment, under normal conditions and in crisis
conditions, to test two above hypotheses.
The thesis analyzes the latest updated data of commercial banks in Vietnam for the

period of 2008 - 2016. The research results suggest solutions to help Vietnamese
and SBV managers to have appropriate strategies and solutions.


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CHAPTER 3: RESEARCH METHODOLOGY
AND RESEARCH DATA
3.1. Researh data
The study was conducted with a sample of 24 commercial banks in Vietnam
from 2008 to 2016. Data for internal variables within the bank were collected from
the annual financial statements of commercial banks. Data for external factors of the
macro environment are collected from formal sources such as the World Economic
Outlook (WEO), data set of the International Monetary Fund (IMF), and General
Statistics Office of Vietnam.
3.2. Research Methodology:
3.2.1. Measure and analyse the factors impact the level of competition of
commercial banks
3.2.1.1. Measure the level of competition of commercial banks
To proxy the degree of competition of commercial banks, we use the Lerner index
which has been used by Berger et al. (2008), Fernández de Guevara et al. (2005),
Berger et al. Maudos and Solís (2009), Xiaoqing (Maggie) Fu et al. (2014). The
Lerner index for banks is calculated as follows:
𝐿𝑒𝑟𝑛𝑒𝑟 =

𝑃𝑖𝑡 − 𝑀𝐶𝑖𝑡
𝑃𝑖𝑡

Where Pit is the output price of bank i in year t, calculated by the ratio of total
income to total assets. MCitis the marginal cost of bank i in year t. However,

marginal cost can not be observed directly, so it is estimated based on the function
of the total bank cost (Ariss, 2010; Fenandez de Guevara et al., 2005; Xiaoqing
(Maggie) Fu et al, 2014).
3.2.1.2. Factors impact the level of competition of commercial banks
Inheriting related studies, the thesis use below model to analyze the factors affecting
the level of competition of commercial banks:
Lernerit = α + β1 Lernerit-1 + β2 EQTAit + β3 LOANTAit + β4 ROEit + β5 CIRit
+ β6BANKSIZEit + β7 GDPt + β8 INFt + uit(3)


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Besides, to consider the impact of these factors on the level of competition of
Vietnam commercial banks under normal conditions and crisis conditions, we add
to model (1) a CRISIS dummy variable. The dummy variable value is 1 during the
economic crisis of 2008-2009 and is 0 in the remaining years. Specific models are
as follows:
Lernerit = α + β1 Lernerit-1 + β2 EQTAit + β3 LOANTAit + β4 ROEit + β5 CIRit
+ β6 BANKSIZEit+ β7 GDPt + β8 INFt + β9 CRISISt + uit (4)

3.2.2. Measure and analyse factors affecting the stability of commercial banks
in Vietnam
3.2.2.1. Measure the stability of commercial banks in Vietnam
There have been many studies that developed the methods of measuring
commercial bank stability, most of which use Z-scores. In this study, we follow the
studies of Boyd & Graham (1986Hannan & Hanweck (1988), and Boyd & Ctg
(1993) to useZ-scores, which are calculated as follows:

𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡 =

𝑅𝑂𝐴𝑖𝑡 + 𝐸𝑄𝑇𝐴𝑖𝑡
𝛿𝑅𝑂𝐴𝑖𝑝

Where:
𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡 is the Z-score measures the bank i 's financial stability in year t.
𝑅𝑂𝐴𝑖𝑡 is the return on total assets of bank i in year t, calculated as the after-tax profit
divided by total assets.
𝐸𝑄𝑇𝐴𝑖𝑡 is the ratio of equity to total assets of bank i in year t, calculated by the average
equity divided by total assets.
𝛿𝑅𝑂𝐴𝑖𝑝 is the standard deviation of the bank's ROA in the study period p.


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According to the above formula, the lower the Z-score, the lower the financial
stability of the bank. In contrast, the higher the Z-score, the higher the financial
stability of the bank.
3.2.2.2. Factors affecting the stability of commercial banks in Vietnam
Inheriting previous studies, the thesis builds a model for analyzing the
factors affecting the financial stability of Vietnamese commercial banks as follows:
𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖,𝑡 = 𝛼 + 𝛿𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖,𝑡−1 + 𝛽1 (𝐸𝑄𝑇𝐴)𝑖𝑡 + 𝛽2 (𝐿𝑇𝐷)𝑖𝑡 + 𝛽3 (𝐿𝐿𝑃)𝑖𝑡 +
𝛽4 (𝐶𝐼𝑅)𝑖𝑡 + 𝛽5 (𝑅𝑂𝐸)𝑖𝑡 + 𝛽6 (𝐵𝐴𝑁𝐾𝑆𝐼𝑍𝐸)𝑖𝑡 + 𝛽7 (𝐿𝑂𝐴𝑁𝑇𝐴)𝑖𝑡 + 𝛽8 (𝐺𝐷𝑃)𝑡 +
𝛽9 (𝐼𝑁𝐹)𝑡 + 𝛽10 (𝐶𝑅𝐼𝑆𝐼𝑆)𝑡 + 𝜀𝑖𝑡 (6)
3.2.3. Empirical Model to study the impact of bank competition to financial
stability
To search for empirical evidence for "competition –stability" and "competition –
fragility" views, we use dynamic model as follows
𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡 = 𝛼𝑖𝑡 + 𝛿𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡−1 + 𝛽1 𝐿𝑒𝑟𝑛𝑒𝑟𝑖𝑡 + 𝛽2 𝐿𝑒𝑟𝑛𝑒𝑟𝑖𝑡2 +
𝛽3 𝐵𝐴𝑁𝐾𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽4 𝐿𝑂𝐴𝑁𝑇𝐴𝑖𝑡 + 𝛽5 𝑂𝑊𝑁𝑖𝑡 + 𝜀𝑖𝑡 (7)
In addition, in order to find evidence of the impact of competition on the stability of

commercial banks under crisis conditions, we add the crisis dummy variable
representing Period of financial crisis. The dummy variable value is 1 in 2008, 2009
and is set to 0 in the remaining years. Specific models are as follows:
𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡 = 𝛼𝑖𝑡 + 𝛿𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡−1 + 𝛽1 𝐿𝑒𝑟𝑛𝑒𝑟𝑖𝑡 + 𝛽2 𝐿𝑒𝑟𝑛𝑒𝑟𝑖𝑡2 + 𝛽3 𝐶𝑅𝐼𝑆𝐼𝑆𝑡 +
𝛽4 𝐵𝐴𝑁𝐾𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽5 𝐿𝑂𝐴𝑁𝑇𝐴𝑖𝑡 + 𝛽6 𝑂𝑊𝑁𝑖𝑡 + 𝜀𝑖𝑡 (8)
The dual impact of competition in crisis conditions on the stability of commercial
banks is assessed by the lerner x crisis, as follows:

𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡 = 𝛼𝑖𝑡 + 𝛿𝑙𝑛𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡−1 + 𝛽1 𝐿𝑒𝑟𝑛𝑒𝑟𝑖𝑡 + 𝛽2 𝐿𝑒𝑟𝑛𝑒𝑟𝑖𝑡 × 𝐶𝑅𝐼𝑆𝐼𝑆𝑡 +
𝛽3 𝐵𝐴𝑁𝐾𝑆𝐼𝑍𝐸𝑖𝑡 + 𝛽4 𝐿𝑂𝐴𝑁𝑇𝐴𝑖𝑡 + 𝛽5 𝑂𝑊𝑁𝑖𝑡 + 𝜀𝑖𝑡 (9)


20

3.2. Estimation methodology
The thesis estimated models (3), (4), (5), (6) using SGMM method.
Model reliability tests performed include:
Autocorrelation test of the residual: According to Arellano & Bond (1991), the
GMM estimate requires a first order correlation and no quadratic correlation.
Model fitment tests and representative variables: Similar to other models, model fit
can be done through F-tests.
The models (7), (8), (9) are estimated by the Difference GMM (DGMM) method of
Arellano & Bond (1991).


21

CHAPTER 4: ANALYSIS OF BANKING COMPETITION,
FINANCIAL STABILITY AND IMPACT OF COMPETITION
TO FINANCIAL STABILITY OF VIETNAMESE

COMMERCIAL BANK IN 2008 – 2016
4.1. Overview of research sample
Table 4.1: Descriptive Statistics of sample
Variables

Obs

Means

Zscore

216

24,6960

Lerner

216

BANKSIZE

Std. Dev.

Min

Max

12,1832

1,3217

62,1955

0,2958

0,0849

0,0214

0,6085

216

17,9791

1,2564

14,6987

20,7299

LOANTA

216

0,5113

0,1564

0,0047

0,8517

CIR

216

0,8932

0,0795

0,6137

1,2187

ROE

216

0,0843

0,0866

-0,8200

0,2846

GDP

216

0,0592

0,0048

0,0525

0,0668

INF

216

0,0904

0,0693

0,0063

0,2312

EQTA

216

0,1125

0,0811

0,0241

0,9994

Dependant variable

Independant variable

Source: Calculating result from Stata

The correlations matrix between variables is as follow:


22

Table 4.2: correlations matrix between variables
zscore banksize
zscore
banksize
eqta
ltd
llp
loanta
cir
roe
gdp
inf
lerner
own
crisis

1.0000
-0.2659
0.3435
0.4107
0.0103
0.2298
-0.1197
-0.0151
-0.1419
0.2151
0.2213
-0.2320
0.1676

1.0000
-0.6333
-0.2796
0.0782
0.1380
0.0653
0.2982
0.1884
-0.3193
-0.5132
0.4664
-0.2766

eqta

ltd

1.0000
0.1407
-0.0435
-0.1442
-0.2918
-0.1733
-0.1417
0.2308
0.5292
-0.2206
0.1855

1.0000
-0.0304
0.4789
-0.2771
0.1787
-0.0528
0.2177
0.3601
-0.1299
0.2004

llp loanta

1.0000
0.0254
0.0320
-0.0029

0.0837
-0.0916
-0.0887
-0.0443
-0.0538

1.0000
-0.0446
0.1851
0.0309
-0.1263
-0.0324
0.0798
-0.0492

cir

roe

gdp

1.0000
-0.6400
0.0205
-0.1737
-0.8412
-0.1273
-0.2595

1.0000

-0.0321
0.0773
0.3823
0.1829
0.1459

1.0000
-0.2286
-0.1033
0.0477
0.1385

inf lerner

own crisis

1.0000
0.2953 1.0000
-0.1814 -0.0447 1.0000
0.5375 0.3908 -0.1877 1.0000

Source: Calculating result from Stata
4.2. Measure and analyze the factors affecting the level of competition of
Vietnamese commercial banks in the period 2008-2016
4.2.1. Measure the level of competition of Vietnamese commercial banks in the
period 2008-2016
Based on the calculation formula of Abba Lerner (1934), the author
calculates the Lerner index for 24 commercial banks in Vietnam from 2008 to 2016.
Financial data were collected from 24 commercial banks in Vietnam for the total
number of observations of 216. Lerner's calculation results are shown in Appendix

2, whereby the Lerner index is the highest in the nine years 2008-2016 of 60.85%
belonging to TIENPB in 2008, the lowest in 9 years 2008-2016 is 2, 14% in
TIENPB in 2011, Lerner average in 9 years in 2008-2016 of commercial banks in
Vietnam reached 29.58%. Compared with the studies conducted in other countries
and regions in the world, Lerner of commercial banks in Vietnam in the period
2008-2016 was 29.58% higher than 26.53% of Indonesia in 2003 - 2010, 26.71% of
Pakistan during 2003-2010 (Fu et al, 2014) and much lower than Singapore's
48.89%, China's 43.43% (Fu et al, 2014). Thus, when using Lerner to measure the


23

level of competition of commercial banks, the results show that the level of
competition of commercial banks in Vietnam in the period 2008-2016 is quite fierce
compared to other countries in Europe, Asia and the world.
4.2.2. Factors affecting the level of competition of commercial banks in
Vietnam for the period 2008-2016
Regression results show that the 8 variables proposed in the model have
affect to the level of competition of Vietnamese commercial banks, including the
prior year competition index, the average equity on capital ratio, loan on total
assets, the ratio of operating expenses to operating income, return on equity, bank
size, economic growth rate, and inflation rate .

4.3. Measure and analyze the factors affecting the financial stability of
Vietnamese commercial banks in the period 2008-2016
4.3.1. Measure the financial stability of Vietnamese commercial banks
Based on the formula of Boyd & Graham (1986), Hannan & Hanweck
(1988), Boyd et al (1993), Strobel & Lepetit (2013, 2015), the thesis calculate the
Z-score for 24 Vietnam commercial Banks from 2008 to 2016. Financial data was
collected from 24 commercial banks in Vietnam for a total of 216 observations. The

highest Zscore index in 9 years from 2008-2016 is 62.20 belongs to SCB in 2008,
the lowest in 9 years 2008-2016 is 1.32 belongs to TIENPB in 2016, Zscore average
in 9 years in 2008-2016 of commercial banks in Vietnam reached 24.7 , lower than
the level of 32.65 in 2005-2013 (Hoang Cong Gia Khanh & Tran Hung Son, 2015).
Average Zscore of commercial banks in Vietnam for the period 2008-2016 is
at 24,70. Compared with other studies conducted in other countries and regions of
the world, the Zscore of the commercial banks in Vietnam in research period is only
higher than the level of 23.89 of Malaysia in 1995-2008 (Rahman et al, 2012) and
much lower than the 30.59 level of the Asia-Pacific region for the period 2003-2009
(Fu et al, 2014); lower than the average level of 41.78 for the 12 Asian countries for
the period 2001-2007 (Soedarmono 2011); lower than the level of 46.50 of


24

commercial banks in the OECD period 1994-2004 (Hesse & Cihák, 2007); lower
than the level of 86.57 of the average 12 stable operation countries in Europe in
period 2008-2011 ( Chiaramonte et al, 2015). The financial stability of Vietnam
commercial banks measured by Zscore is quite low. In comparison with other
countries in Asia and the world, the activities of Vietnamese commercial banks are
more unstable.
4.3.2. Factors affecting the financial stability of Vietnamese commercial banks
in the period of 2008 - 2016
The dynamics of the factors affecting the financial stability of Vietnamese
commercial banks is measured by the SGMMM. The model (5) looks at the factors
that affect the financial stability of Vietnamese commercial banks under normal
conditions while the model (6) considers the impact in the context of crisis
condition.
Estimated results are as follows: Regression results show that the 8 variables
proposed in the model have affect to the financial stability of Vietnamese

commercial banks including prior year financial stability index, the average equity
rate on total assets, loan to total assets, operating expense on operating income,
return on equity, bank size, business growth rate and inflation rate. Two variables
related to loans on deposits ratio and the risk provision are not statistically
significant.
4.4. Impact of competition on financial stability in Vietnam commercial banks
in the period 2008 - 2016
Table 4.6 presents results of models estimation by DGMM method.
Dependent variables used in the model to assess the impact of competition on the
stability of Vietnamese commercial banks are Z-scores. Estimates for each
dependent variable are conducted in the following order: (i) consideration of the
impact of competition on the stability of the Vietnamese commercial bank; (ii)
consider the impact of the financial crisis on the stability of the Vietnamese