Impact of Liquidity Transformation to Vietnamese Commercial Banks Adequacy Ratio

Nội dung text: Impact of Liquidity Transformation to Vietnamese Commercial Banks Adequacy Ratio

1. Impact of Liquidity Transformation to Vietnamese Commercial Banks Adequacy Ratio Nguyen, Hong Yen1 - Le, Ngoc Minh Chau2 1 Banking Academy of Vietnam; 2 KIS Vietnam Securities Corporation Ngày nhận: 08/05/2021 Ngày nhận bản sửa: 26/05/2021 Ngày duyệt đăng: 09/06/2021 Abstract: The purpose of this research is to findout the impact of liquidity transformation on capital adequacy ratio (CAR) of Vietnamese commercial banks. By using Generalized Least Square regression model for 16 Vietnamese banks in the period 2012-2020 with dependent variable ‘capital adequacy ratio CAR’, independent variable ‘lag liquidity transformation LTG t-1’ and some additional control variables (namely: the lag capital adequacy ratio CARt-1, return on equity ROE, credit risk CRSK, gross domestic product GDP, inflation rate INFL), this study finds that liquidity transformation (LTGt-1) has negative effect on capital adequacy ratio (CAR), while the variables lag capital adequacy ratio (CARt-1) and credit risk (CRSK) are positively related to CAR, while, ROE, GDP and INFL have Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam Tóm tắt: Bài viết thực hiện đánh giá tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các Ngân hàng thương mại Việt Nam. Sử dụng phương pháp hồi quy bình phương tối thiểu tổng quát để kiểm định cho 16 ngân hàng ở Việt Nam trong giai đoạn từ năm 2012 - 2020 với biến độc lập là CAR, biến phụ thuộc là biến trễ của LTGt-1 và một số biến kiểm soát là nhân tố bên trong là tỉ lệ vốn tối thiểu năm trước (CARt-1), khả năng sinh lời (ROE) và rủi ro tín dụng (CRSK) và các biến số vĩ mô có thể có tác động tới tỉ lệ vốn tối thiểu là: tổng sản phẩm quốc nội (GDP) và tỉ lệ lạm phát (INFL). Kết quả của nghiên cứu đã chỉ ra rằng biến LTGt-1 có tác động ngược chiều tới biến CAR trong khi đó các biến CARt-1 và CRSK có tác động cùng chiều đến tỉ lệ an toàn vốn tối thiểu CAR. Ngược lại, các biến ROE, GDP và INFL không có ý nghĩa kinh tế trong quan hệ với tỉ số CAR. Từ khóa: Ngân hàng thương mại Việt Nam, Tỉ lệ an toàn vốn tối thiểu, Khả năng chuyển đổi thanh khoản, Phương pháp bình phương tối thiểu tổng quát Nguyễn Hồng Yến Email: yennh@hvnh.edu.vn Học viện Ngân hàng Lê Ngọc Minh Châu Email: minhchau1812@gmail.com Công ty cổ phần chứng khoán KIS Việt Nam Tạp chí Khoa học & Đào tạo Ngân hàng © Học viện Ngân hàng Số 229- Tháng 6. 2021 12 ISSN 1859 - 011X
2. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU insignificant effect on CAR. Keywords: Capital adequacy ratio, Liquidity transformation, generalized Least Square, Vietnam 1. Introduction quacy ratio of commercial banks have been conducted by many authors from different The modern theory of financial interme- angles. In which, there are only two studies diation suggest that banks perform two on factors affecting capital adequacy from a basic functions: risk transitions and li- liquidity perspective, which are the studies quidity transitions (Berger & Bouwman, of Vu Huu Thanh et al. (2016) and Le Tu 2009). It is evident that to fulfill these two (2018). Both of these studies talk about the transformational roles, maintaining capital correlation between liquidity conversion adequacy is always extremely important and bank capital, not about CAR. These for banks, hence why much concern is be- two studies conclude that liquidity conver- ing expressed in the relationship between sion and bank capital are negatively related. these two transition fuctions and bank’s Up to date, in Vietnam, there has been no capital. However, the relationship between research on the impact of liquidity transfor- bank captital and bank risk-taking has mation on the CAR of banks. been mentioned in many studies, there is With these research gaps, in order to not much attention paid to the liquidity provide other perspective study on the transformation - the use of highly liquid factor affect the bank CAR, based on the sources to finance low-liquidity bank research of Alhassan (2017), the study is assets. People often approach bank liquid- the first attempt to investigate the impact ity from the perspective of liquidity risk of liquidity transformation on Vietnam- management, but the empirical studies ese commercial banks’ CAR. The study on liquidity transformation are quite rare considers 16 commercial banks (which (Horvath, Seidler & Weill 2012). So far, accounting for nearly 80% of Vietnames the studies on the two issues CAR and bank total asset) as of December 2020 it liquidity are quite detached. The relation- the spans of 9 years. The variables used ship between liquidity transformation include lagged liquidity transformation and CAR is not interested in researches gap, return on average equity, credit risk, (Novokmet & Marinovic, 2016). Alhassan gross domestic product, and inflation. The (2017) is the only one which studied the main finding of the study is that liquidity effect of liquidity convertibility on CAR transformation has a statistically negative of 20 banks in Ghana. This study con- effect on bank’s capital adequacy in Viet- cludes that the liquidity of banks in Ghana nam, the Financial Fragility Hypothesis is positively correlated with CAR. and Crowding Out Hypothesis are rea- In Vietnam, the implementation of the sonable for Vietnam during the research Basel II Capital Agreement in particular as period. It will be a theoretical as well as well as compliance with the capital ade- practical suggestion for the management quacy ratio (CAR) for commercial banks in of sufficient capital through management general is extremely urgent. Studies on the of banks’ ability to convert liquidity. factors affecting the minimum capital ade- The rest of the paper is organized as fol- Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 13
3. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam lows. Section 2 reviews the theoretical On the other hand, “Financial Fragil- and empirical literature of the relation- ity- Crowding Out Hypothesis” predicts ship between liability transformantion and an inverse relationship between liquidity bank’s captial. Hypotheses developed in transformation and the bank capital. Ac- this section, relating in impact of liquidtity cording to the Crowding-out hypothesis, transformation to captital adiquacy ratio the increasing amount of deposits forced is tested in Section 3. After analyzing the banks to perform credit operations to regression result in Section 4, the Section earn profits to offset the costs payable to 5 concludes the paper with some policy depositors. The increase in deposits from implications and directions for future large numbers of retail customers with research. short maturities- liquid liabilities will in- crease the bank’s liquidity transformation 2. Literature review for credits with fewer customers, large credit value and long credit terms- illiquid 2.1. Theoretical review assets, and liquidity risk accordingly also increased. The theory of financial fragil- There are two opposite theories about the ity indicates that the increase in equity is relationship between the liquidity transfor- much more passive than the increase in mation and the bank’s capital. On the one depositors. The bank shareholders are not hand “Risk Absorption Hypothesis” argues at liberty to provide funds to the bank at that bank capital increases banks’ ability their chosen time, while the depositors can to bear risk since capital absorbs risk (e.g. flexibly send money to the bank at any Von Thadden, 2004; Repullo, 2004; Coval time. In this situation, deposits are said to & Thakor, 2005; Bhattacharya & Thakor, have “crowded- out” capital, thereby com- 1993) and the risk from liquidity transfor- pelling banks to fund long- term loans and mation is no exception. Specifically, more investments with deposits. This situation liquidity created from bank also means that increases the bank’s dependence on depos- the more illiquid assets, the higher the level its, banks will be less likely to seek to in- of loss for handling illiquid assets. To avoid crease equity. Over time it will reduce the bankruptcy when not meeting the liquidity bank’s capital ratio in the capital structure. demands of customers, the bank needs to Therefore, liquidity transformation has a find sources to compensate when the liquid negative relationship with bank capital. liabilities has expired but still has not col- In both theories, an increase in liquidity lected money from investing in illiquid as- conversion is accompanied by an increase sets. At this time, in order not to passively in less liquid assets (fewer liquid assets borrow on the interbank market at a large are often associated with higher risk), the cost, banks will actively increase their capi- difference between these two theories is tal in proportion to the increase in liquidity just the relationship between the liquidity created. Therefore, the “risk absorption transformation and the incentive to in- hypothesis” predicts a positive association crease the bank’s equity. Therefore, it can between liquidity transformation and bank be seen that both theories show that liquid- capital adequacy. The more liquidity banks ity transitions have an impact on a bank’s transform, the higher capital level the bank CAR through risky assets and bank capi- will maitain to avoid bank insolvency. tal, but the effect is in opposite directions. 14 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
4. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU 2.2. Empirical Review in Ghana in the period of 2006- 2015. This study concluded that banks’ liquidity There are many empirical literatures on transformation in Ghana is positively cor- liquidity risk or liquidity transformation related with CAR, suggesting that banks but few of them assess matter associated often increase their capital reserves with relationship between bank’s liquidity increasing liquidity, in order to absorb li- transformation and its capital (Berger and quidity risks from this activity and ensure Bouwman, 2009). solvency. Among the empirical studies on liquid- In Vietnam, there are only two studies ity transitions, two are well-known, the mentioning the ability to liquidity transfor- researches of Deep & Schaefer (2004) and mation. These studies were Vu Huu Thanh Berger & Bouwman (2009). These two et al. (2016) and Le Tu (2018), both of studies provide the method to measure these studies are about the correlation liquidity transformation and become foun- between liquidity creation and banking dation for other studies to develop. capital. Based on Berger & Bouwman’s Deep and Schaefer (2004) gives a measure (2009) study, GMM and three-stage least bank’s liquidity transformation, using the square regression methods, the two stud- concept of “Liquidity Transition Gap - ies conclude that liquidity transformation LTG”. They applied this on a sample of and bank capital have a negative relation- 200 large banks in the United States and ship. Specifically, bank capital affects 30% indicated that the banking industry created of liquidity transformation but liquidity liquidity of up to 20% of its total assets, transformation only explains 4% of the banks do not seem to create liquidity. variation of bank capital. Le Tu (2018) Berger & Bouwman (2009) use the con- also concluded that big banks generated cept of “Liquidity Creation- LC” to mea- 92% of liquidity in the banking system sure bank’s liquidity transformation, with over the period 2007- 2015. the four measures: ‘cat fat’, ‘mat fat’, ‘cat The research conducted by Vu Hung Phu- nonfat’, and ‘mat nonfat’ which are based ong and Dang Ngoc Duc (2020) identi- on category, maturity, category with off fied the factors affect the capital adequacy balance sheet activities, and maturity with ratio (CAR) of Vietnamese commercial off balance sheet activities, then assign banks for the period from 2011 to 2018. weighting for asset types to calculate total However, the variables that are hypoth- liquidity creation. The study found that esized to affect the capital adequacy ratio banks in the United States created nearly of commercial banks in Vietnam are bank double the amount of liquidity during the size (SIZE), deposit (DEP), loan (LOA), period from 1993 to 2003. In 2003, the loan loss reserves (LLR), liquidity (LIQ), banking system generated approximately return on assets (ROA), return on capital $4.56 of liquidity per $1 of capital. (ROE), net interest margin (NIM), non- Based on the measurement method of performing loans (NPL) and leverage Deep & Schaefer (2004) and Berger & (LEV). There is no examination of the Bouwman (2009), Alhassan (2017) used impact of liquidity transformation to CAR GMM regression method to determine the in this research. impact of liquidity transformation to the capital adequacy ratio CAR of 20 banks 2.3. Research Gap Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 15
5. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam Research on the relationship between Macroeconomic data are collected from the liquidity transformation and bank capital official websites of The World Bank. has been available in Vietnam. However, research on the impact of liquidity trans- 3.2. Research Model formation on capital adequacy ratio CAR has not been done yet in Vietnam while Our research model is based on the origi- the bank’s liquidity transformation not nal model of Alhassan (2017) on the im- only affects bank capital but also affects pact of liquidity transformation to capital the bank’s risk assets. Moreover, liquid- adequacy ratio CAR of commercial banks ity transformation is one of the two core in Ghana over the period 2006 - 2015. activities of the bank in addition to the Of which, the dependent variable CAR risk transformation, so it will partly affect represents the bank solvency. In fact, the capital adequacy ratio CAR- the ratio banks are more likely to fail if they have measures the safety in banking operations. a sufficiently low capital adequacy ratio. Therefore, a study on the impact of liquid- The capital adequacy ratios (CAR) in this ity transformations on the banks’ CAR is study were calculated according to the needed. current regulation, Circular No.36/2014/ TT-NHNN (equivalent to the calculation 3. Research Methodology in Basel I). The independent variable is the lagged 3.1. Sample liquidity transformation gap (LTG)- repre- sents for bank’s ability to convert liquid- Our study uses the data of 16 commercial ity. To calculate the LTG, our research banks (Appendix 1) that had assets account- firstly reclassified the banks’ assets and ed for nearly 80% of the total assets of the liabilities into liquid, semi-liquid and Vietnamese commercial banking system by illiquid groups by pointing out some the end of 2020. This sample also includes limitations in the research of Vu Huu 10 commercial banks selected by the State Thanh et al. (2016) (as shown in Apendix Bank of Vietnam to implement the capital 2). Then, by combining two methods of and risk management method according to Deep & Schaefer (2004)- liquidity trans- the Basel II Capital Accord. formation gap and Berger & Bouwman Among the selected sample banks, Sai (2009)- liquidity creation- we calculates Gon- Ha Noi Bank (SHB) was merged the LTG for Vietnamese banks. The LTG, with HBB in August 2012. Therefore, to therefore, is calculated by the following ensure consistency, the analytical data is formula: based on these banks’ Financial Statement Liquidity Transformation Gap = (Liquid from 2012 to the end of 2020. Finally, our Liabilities - Liquid Assets) ÷ Illiquid Assets number of observations is 144 (include 16 (1) banks in the period of 2012-2020). Based on this, higher values of LTG imply Financial data were collected from Finan- higher liquidity risk or the more liquidity cial Statemenets and Annual Reports which banks transform, the higher the liquidity are available at the official websites of these risk they are exposed to. Because they commercial banks over the period 2012- have to transform redundent liquid liabili- 2020 and financial data platform FiinPro. ties to finance illiquid assets. 16 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
6. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU Control variables are included in the mod- ratios, only approximately 9%- the mini- els as they have effect on bank solvency. mum requirement. Meanwhile, small-sized Of which, bank internal factors are profit- commercial banks like Maritimebank or ability (Return on Average Equity - ROE) VIB always maintain a high capital ad- and loan losses (Credit Risk - CRSK) and equacy ratio, up to 18% or over 24% in external factors variables are economic some years. However, a high CAR may growth (Gross Domestic Product - GDP) not indicate that small banks are perform- and price instability (Inflation- INFL). ing well, but it can show that the bank has Basically, our study based on the original difficulty in lending or attracting deposits study of Alhassan (2017) after removing from customers (Than Thi Thu Thuy and the two variables ROA and SIZE. The Nguyen Kim Chi, 2015). Subsequently, reasons for this elimination are: (i) For the SIZE variable is removed from our the ROA variable: there is autocorrela- regression model. tion between ROA and ROE (as shown Therefore, the following research model is in Appendix 3) and after variable filtering used in our study: we choose ROE variable to represent for CARi,t = β0 + β1CARi,t-1 + β2LTGi,t-1 + bank’s profitability; (ii) For the SIZE vari- β3ROEi,t + β4CRSKi,t + β5GDPt + β6INFLt able: we found that in Vietnam there is an + εi,t unreasonable correlation between the size i = 1÷16 and t = 2012÷2020 of the bank and the CAR. Specifically, as shown in Appendix 2, the actual CAR data 3.3. Specification of variables of Vietnamese banks shows that large- scale commercial banks such as BIDV and Based on the second correlation matrix VietinBank have low capital adequacy table (Appendix 4) analyzing the correla- Table 1. Expected Impact of Explanatory Variables on Capital Adequacy Variable Symbol Measure Expected sign Tier 1 Capital + Tier 2 Capital Capital Adequacy Ratio CAR Risk Weighted Assets Capital Adequacy Ratio of Tier 1 Capital + Tier 2 Capital CARt-1 + the previous year Risk Weighted Assets Liquidity Transformation of Liquid Liabilities - Liquid Assets LTGt-1 +/- the previous year Illiquid Assets Net Profit after Tax Return on Equity ROE + Average Assets Loan Loss Provision Credit Risk CRSK +/- Gross Loans Annual rate of growth of Gross Gross Domestic Product GDP - Domestic Product Inflation Rate INFL Annual Inflation Rate +/- Source: Summarized by the authors Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 17
7. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam tion among the variable in the model, we Table 2. Variance Inflation Factor – VIF found that, the correlation between the Variable VIF variables is relatively low (less than 50%), CARt-1 1.24 so it can be considered that the multicol- linearity model does not occur. LTGt-1 1.38 And the table 2 shows the average varian ROE 1.10 inflation factor (VIF) magnification coef- CRSK 1.14 ficient for the model is less than 2, so the GDP 1.10 model does not have a multi-collinearity INFL 1.29 phenomenon. The statistic of the variables can be sum- Mean VIF 1.21 Source: Authors’ calculations from STATA software Table 3. Descriptive Statistic Variable Obs Mean Std. Dev. Min Max CAR 144 0.1312507 0.0424494 0.0834 0.04015 CARt-1 144 0.1327424 0.0421736 0.0877 0.04015 LTGt-1 144 -0.1964005 0.4154136 -2.35584 0.8246939 ROE 144 -0.1128303 0.0757943 0.0002829 0.2956575 CRSK 144 0.0134357 0.0047878 0.0063098 0.0475195 GDP 144 0.0592889 0.0124131 0.0291 0.0708 INFL 144 0.0404178 0.0236525 0.0063 0.0921 Source: Authors’ calculations from STATA software Note: Obs: Number of Observations (which derived from 16 commercial banks over the period of 9 years from 2012 to 2020); Mean: Mean value; Std.Dev.: Standard Deviation; Min: the minimum value; Max: the maximum value marized in the following Table 3. minimum value of the all observations It can be seen that the value of capital at 8.34% in 2020), Vietinbank and Mili- adequacy ratio CAR of Vietnamese com- tary Bank tend to be low, only around the mercial banks over the period 2012- 2020 level of the SBV’s regulations; while the does not have a specific volatility trend, small commercial banks’ CAR is higher, ranging from 8.34% to 40.15%, the aver- such as Maritime Bank’s CAR reaches age value is 13.12% with the standard the highest level at 24.53 in 2015 or CAR deviation at 4.24%. This is a relatively of TPBank has been up to 40% in 2012, high number compared to the 9% required however this ratio of TPBank has been by the SBV during this period in the Cir- decreasing at around 9-10% in the recent cular 36/2014/TT-NHNN. These figures years. As shown in research by Reynolds show a quite healthy way in operating of et al. (2000) on the financial structure and the sample commercial banks. However, performance of banks in Asian countries when deeply looking in these banks’ An- during 1987- 1997 with the conclusion nual Reports we found the CAR of big that capital safety has a negative relation- commercial banks such as BIDV (with ship with scale, large banks have lower 18 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
8. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU capital adequacy ratio than small banks, are 4.75% (of TPB in 2012) and 0.63% the CAR value of banks in Vietnam is (of EIB also in 2012) respectively. With a perfectly suited. relatively low number of CRSK in gen- Similar to capital adequacy ratio (CAR), eral, these commercial banks show good the value of lagged capital adequacy ratio quality credit balance and they don’t need (CARt-1) of commercial banks ranges to make high provision or vice versa. This from 8.8% to 40.15%, the average value is may indicate that the provisioning is not 13.27% with standard deviation at 4.22%. taken seriously by commercial banks dur- LTGt-1 has an average value of 0.1964 ing the study period. indicating that sample banks are creating The GDP of Vietnam’s economy over liquidity, but at a extremely low level. the period 2012- 2020 averaged at 5.93% Although using liquid liabilities to fund with the smallest value is 2.91% in 2020 illiquid assets, it is still at a safe and low (because of covid pandamic) and the larg- risk level. With a standard deviation of est value is 7.08% in 2018. The inflation up to 41.54%, the difference in LTGt-1 rate was quite low during the study period between banks is quite large. The small- consistently around 2-3%. Particularly, est LTGt-1 value is -2.35584 of TP Bank only 2012 was at the highest level of more in 2012 and the largest one is +0.8245 than 9% and the lowest level was in 2015 of Vietcombank in 2018. That means at only more than 0.6%. Vietcombank illiquid assets are financed almost by liquid liabilities in that year- an 4. The Regression Results and Analysis extremely dangerous level. Besides VCB and ACB that had positive LTG almost By using the mathematical statistics tool during the study period, in recent years, with the support of the STATA software BIDV, MBB, SHB, STB and KLB always to run the model. At first, we used the maintained a positive LTG ratio. Base on FEM, REM regressions method to run the LTG-calculated fomular (1) above, the the model and after check for defects in positive LTGs in these cases mean in these the model. We see that the model has the banks liquid liabilities are bigger than heteroskedasticity and autocorrelation er- liquid assets. In other words, these banks rors. According to Wooldrige (2002), the have to use liquid liabilities to finance il- Generalized Least Squares (GLS) method liquid assets in the recent years. can be used to ensure that the obtained Return on equity ROE has an average estimates are stable and efficients. Subse- value of 11.28% with a standard deviation quently, the study uses the GLS regression of 7.58%, maximum and minimum values model with some addition options namely are 29.57% (of VIB in 2020) and 0.03% panels (heteroskedastic), corr (ar1) and (of NCB in 2020) respectively. In particu- rhotype (dw) in order to minimize serial lar, low value of ROE often appears in heteroscedasticity and autocorrelation banks with small capitalization in the post- problem. The results are summarized for crisis period of 2007- 2008 and the period all three methods in Table 4. of low credit growth in 2013- 2014. The results of the GLS method is chossen, The average value of CRSK in this pe- then the sample regression model is shown riod is 1.34% with a standard deviation below: of 0.48%, the largest and smallest values CARi,t = 0.0462 + 0.2979CARi,t-1 Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 19
9. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam Table 4: The Impact of Liquidity Transformantion to the Banks’ Capital Adequacy Ratio Dependent Variable: CAR Variables Expected Sign FEM REM GLS + 0.240478 0.4463106 0.2979427 CARt-1 (0.001) (0.000) (0.000) +/- - 0.0224561 - 0.0186645 - 0.0172463 LTGt-1 (0.025) (0.012) (0.003) + 0.0500589 - 0.0427185 - 0.0141882 ROE (0.326) (0.242) (0.581) +/- 4.601281 2.363713 2.314321 CRSK (0.000) (0.000) (0.000) - 0.2349408 0.1715062 0.140682 GDP (0.242) (0.443) (0.226) +/- 0.0123279 0.0814163 0.0516033 INFL (0.917) (0.520) (0.510) 0.0130213 0.0279433 0.0462359 _cons (0.519) (0.168) (0.001) t statistics in parentheses; * p F = 0.000 Chi2(4) = 38.14 Hausman with sigmamore Prob > Chi2 = 0.000 F (1,15) = 29.115 Wooldridge test Prob > F = 0.0001 Chi2 (16) = 986.29 Modified Wald test Prob > Chi2 = 0.0000 Source: Authors’ calculations from STATA software - 0.0172LTGi,t-1 - 0.0142ROEi,t + increase by 0.2979%. This finding entirely 2.3143CRSKi,t + 0.1407GDPt + 0.0516IN- consistent with the conclusion of Alhas- FLt + εi,t san’s research (2017). As expected, the lag value of CAR (CARt- Table 3 shows that the coefficient of LTGt- 1) has a positive and 1% statistically 1 is significant and negative, suggesting significant impact on the CAR of the cur- that the greater the bank liquidity transfor- rent year, reflecting the consistency in the mation reduce the CAR. With a extremely attitude of maintaining the bank’s capital high level of significant, a 1% increase in adequacy ratio. When the capital adequacy the previous liquidity transformation gap ratio of the previous year increased by decreases the CAR of the current year by 1%, the CAR of the following year will 0.0172%. This finding does not support 20 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
10. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU the finding of our based research Alhas- mercial banks in the period of 2009- 2015. san (2017). But it is in line with those of The variables Gross Domestic Product Vu Huu Thanh et al (2016) and Le Tu (GDP), Return on Equity (ROE) and Infla- (2018) work on Vietnamese banks for the tion rate (INFL) have statistically non- earlier period of time. While the effect significant effect on CAR at allas ( shown found by Le Tu (2018) is quite high, our in Table 4). finding is more consistent with Vu Huu Thanh (2016) of relatively small effect. 5. Conclusion and Recommendation This negative effect confirm the Financial Fragility-Crowding Out Hypothesis is ap- The authors successfully completed the propriate in Vietnam. Accordingly, with goals of the research, which is empirical the underdeveloped capital market in Viet- study impact of liquidity transformation nam, both Vietnamese banks and enter- on the Capital Adequacy Ratio (CAR) of prises find it difficult to raise fund through the bank and it showed that the impact is this market. On the one hand, with only a inversely proportional in Vietnam. This handful of investment chanels, people tend impact clearly showed that liquidity trans- to deposit their idle money into bank. And formation is a signal to show in which di- banks, of course, have better access to de- rection the CAR is developing in. Because posit facilities while have lower ability to of this, it is one of the most important access capital markets. On the other hand, statistic for banks to follow in managing enterprises have to raise fund by borrow- their business in general and in control- ing more money with a longer term at the ling capital adequacy ratio to be specific. bank, making the risk-weighted assets of Based on the results of the research, the the bank increase. Both of these trends authors came up with some following cause CAR (the ratio of bank’s capital recommendations: over risk-weighted assets) to decline. The Nextremely high and positve coef- 5.1. Recommendations for commercial banks ficient of CRSK (+2.3143) with p-value< 1% represents a significant effect on CAR. Banks need to build a large database in This finding is perfectly consistent when order to accurately identify their liquid- facing bigger risk banks have to keep ity convertibility (represented by liquid- higher capital adequacy ratios because ity transformation gap) to manage their they are required to set aside more capital capital adequacy ratio. As explained in the as a buffer against losses. This conclu- research, liquidity transformation gap is sion is consistent with the research results calculated by determining the actual du- of Mili et al (2014), Masood and Ansari ration of bank assets and liabilities. This (2016) on the banking system at Pakistan determination is in fact based not only on and Alhassan’s research (2017) on the the terms of assets and liabilities but also Ghana banks. However, the conclusion on the behavior of the customer which must is different from the results of empirical be based on a big database to help the bank evidence of banks in Jordan (Al-Sabbagh, clearly identify. Based on the big database, 2004) and research of Le Thanh Tam et banks can identify the factors affecting al. (2017) on the determinants of capital customer behavior in early deposit with- adequacy ratios of 26 Vietnamese com- drawal or early loan repayment. There for, Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 21
11. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam building the database system is a problem Therefore, banks need to control overdue that banks should put an eye on, especially debts. in the Fourth Industrial Revolution. Reduce the amount of liquidity created. 5.2. Recommendations for management The result of the research show that bank’s agencies liquidity transformation gap has an inverse impact on capital adequacy ratio. There- Management agencies need to be aware of fore, the overuse of short-term funds for the importance of the liquidity transforma- medium and long-term loans will not only tion of the banking system. affect bank liquidity risk as known prior Supervising authorities need to see the but it’ll also reduce the bank’s capital ad- importance of managing liquidity transfor- equacy ratio. Because of this, banks need mation of commercial banks. From that, to reduce their liquidity transformation if they need to establish a reasonable range they want to improve their capital ad- boundary for liquidity transformation for equacy ratio. There are two requirements commercial banks in order to balance in order to perform this. Firstly, increasing between profits and risks of the banks, long term mobilized funds by creating big which will increase their capital adequacy gap between short-term and long-term de- ratio. For the liquidity transformation gap posit interest rates to encourage long-term measurement used in research, authors deposits. Besides, banks need to increase suggest the range for liquidity transforma- mobilization through issuing valuable tion gap to be at a range from 0.1 to 0.25 papers, which shows a more stable term because of the fact that banks in this range compared to deposit. Secondly, bank need had ROE at above 10% and CAR at above to use funds with duration corresponding 9% during the study period. Therefore, if to mobilized funds. In fact, the impact LTG is maintained at this range, the bank from liabilities is more difficult, since will not only be safe but also ensure good depositing in the bank is solely a cli- profitability. ent’s decision. The impact from the asset Besides reporting about the status of li- side is needed. Therefore, in addition to quidity, supervising authorities need to ask extending the term of mobilized capital, commercial banks to report about liquid- banks need to have strategies to develop ity transformation gap by day, changes of short-term credit products or to invest in duration of each assets and liabilities and corporate bonds (when the corporate bond not just focusing mainly on managing high market has developed). liquid asset or non-term deposits as cur- Improve bank’s credit risk management rent rules. As mentioned above, statistics capacity. Overdue debts will on one hand about liquidity that are being managed lengthen the actual loan maturities more by supervising authorities have never than the maturity in loan contact. This will been the whole chain but rather showed unexpectedly increase liquidity trans- only in particular banks, supervising the formation ratio and then reduce capital transformed liquidity will help authorities adequacy ratio. On the other hand, these understand the liquidity transformation of overdue debts are factors that increase the whole banking system. This will solve the denominator (risk-weighted assets) liquidity problems between banks can leading to reduce capital adequacy ratio. be solve in a more connective way in the 22 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
12. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU future, instead of the disjointed solutions dictory according to Berger & Bouwman being used now. (2009) research on United State commer- cial banks. 5.3. Recommendations for further research In addition, research on other classifica- tions of liquidity levels of assets and Our research employs all the banks in liabilities, and refer to the liquidity being one sample, therefore, we can not see the created off-balance sheet should be con- detail impact of liquidity transformantion ducted. to banks capital adequacy ratio in different Research on the impact of liquidity trans- size of banks. The researchers can expand formation on each factor that calculates the scope of research both in space and capital adequacy ratio CAR including time and break up research space into spe- equity and risky assets will help to clarify cific banking groups. Because the differ- the extent and direction of the impact of li- ence in liquidity status between large and quidity transformation to each component small commercial banks can be noticed, of CAR, thereby more detailed policies the impact of liquidity conversion on bank can be recommended. ■ groups may be different or even contra- References Ahmad, R., Ariff, M. & Skully, M. (2008), ‘The Determinants of Bank Capital Ratios in a Developing Economy’, Asia- Pacific Finan Markets, 15. pp. 255–272. Aktas, R., Acikalin S., Bakin B., Celik G., 2015, ‘The Determinants of Banks’ Capital Adequacy Ratio: Some Evidence from South Eastern European Countries’, Journal of Economics and Behavioral Studies, Vol. 7, No. 1, p. 79-88. Al-Sabbagh, N. (2004). Determinants of Capital Adequacy Ratio in Jordanian Banks. Master thesis. Yarmouk University. Irbid, Jordan. Alhassan A. S., 2017, ‘Capital adequacy of banks in Ghana: Does liquidity transformation matter?’, Thesis, University of Ghana. Bateni L., Vakilifard H. & Asghari F., 2014, ‘The Influential Factors on Capital Adequacy Ratio in Iranian Banks’, International Journal of Economics and Finance, Vol. 6, No. 11; 2014 Berger, A. N. & Bouwman, C. H., 2009, ‘Bank liquidity creation’, Review of Financial Studies, No. 22(9), pp. 3779- 3837. BIS, (1999) ‘Basel Committee on Banking Supervision: A new capital adequacy framework’, online, available from: (Accessed 12 March 2017), [online]. Available from: publ/bcbs50.pdf (Accessed 12 March 2017). Bhattacharya, S., & Thakor, A. V. (1993). Contemporary Banking Theory. Journal of Financial Intermediation, 3(1), 2-50. Coval & Thakor, 2005, Financial intermediation as a beliefs-bridge between optimists and pessimists, Journal of Financial Economics 75(3):535-569 Deep, A., & Schaefer, G. (2004), Are Banks Liquidity Transformers? Harvard University, John F. Kennedy School of Government. Diamond D. W., 2007, ‘Banks and liquidity creation: a simple exposition of the Diamond-Dybvig model’, FRB Richmond Economic Quarterly, Vol.93(2), pp. 189-200. FiinPro, Horvath, R., Seidler, J., & Weill, L. (2012). Bank Capital and Liquidity Creation. Social Science Research Network. Le Thanh Tam and Nguyen Dieu Linh, 2017, “Cac yeu to quyet dinh toi ty le an toan von cua ngan hang: bang chung thuc nghiem tu Viet Nam” (Factors affect bank’s capital adequacy ratio: an empirical study in Vietnam), NEU publisher, Hanoi, pp. 84-107. Le Tu (2018), The interrelationship between liquidity creation and bank capital in Vietnamese banking, Managerial Finance, Vol. 45 Issue: 2, pp.331-347 Masood, U., & Ansari, S. (2016), ‘Determinants of Capital Adequacy Ratio - A Perspective from Pakistani Banking Sector’, International Journal of Economics, Commerce and Management, 4(17), 247-273. Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 23
13. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam Mili, M., Sahut, J. M., & Trimeche, H. (2014), Determinants of the Capital Adequacy Ratio of a Foreign Bank’s Subsidiaries: The Role of the Interbank Market and Regulation of Multinational Banks (No. 2014-366). Novokmet & Marinović, 2016, Solvency and Liquidity Level Trade-off: Does it Exist in Croatian Banking Sector?, Scientific Annals of Economics and Business 63(3):429-440 Repullo, R. (2004). Capital Requirements, Market Power, and Risk-taking in Banking. Journal of Financial Intermediation, 13(2), 156-182. Than Thi Thu Thuy and Nguyen Kim Chi, 2015, ‘Nghien cuu cac yeu to anh huong den he so an toan von tai cac NHTM CP Viet Nam’ (Studying factors affect capital adequacy ratio of Vietnamese joint stock commercial banks), Banking Review, No. 11 June, 2015. The State Bank of Vietnam (2014). Circular No. 36/2014/TT-NHNN dated November 20, 2014 on stipulating minimum safety limits & ratios for transactions performed by credit institutions & branches of foreign banks [online]. Available from: (Accessed 1 March 2017). The World Bank, Data/Vietnam, Tran, V. T., Lin, C. T., & Nguyen, H. (2016), ‘Liquidity Creation, Regulatory Capital, and Bank Profitability’, International Review of Financial Analysis, 48, pp. 98-109. Von Thadden, E. L. (2004), ‘Bank Capital Adequacy Regulation under the New Basel Accord’, Journal of Financial Intermediation, 13(2), pp. 90-95. Vu Hung Phuong and Dang Ngoc Duc (2020), Determinants influencing capital adequacy ratio of Vietnamese commercial banks, Accounting, 6 (2020), p. 871–878 Vu Huu Thanh et. al, 2016, ‘Von ngan hang, su tao thanh khoan va hieu qua cua ngan hang’ (Bank capital, liquidity creation and bank efficiency), Science Magazine, Open University of Ho Chi Minh City, No. 4(49)2016. Wooldridge, J. (2002), Econometric Analysis of Cross Section and Panel Data, MIT Press. Yuanjuan, L. &Shishun, X., 2012, ‘Effectiveness of China’s Commercial Banks’ Capital Adequacy Ratio Regulation, A Case Study of The Listed Banks’, Inter disciplinary Journal of Contemporary research in busines, 4 (1) p. ijcrb. webs.com. APPENDICES Appendix 1. List of Sample Banks Acronyms Name of Banks 1 ACB Asia Commercial Joint Stock Bank 2 BID JSC Bank for Investment and Development of Vietnam 3 CTG Vietnam Joint Stock Commercial Bank for Industry and Trade 4 EIB Vietnam Joint Stock Commercial Export Import Bank 5 HDB Ho Chi Minh City Housing Development Bank 6 KLB Kien Long Commercial Joint Stock Bank 7 MBB Military Commercial Joint Stock Bank 8 MSB Vietnam Maritime Joint – Stock Commercial Bank 9 NCB National Citizen Commercial Joint Stock Bank 10 SHB Saigon – Hanoi Commercial Joint Stock Bank 11 STB Sai Gon Thuong Tin Commercial Joint Stock Bank 12 TCB Viet Nam Technological and Commercial Joint Stock Bank 13 TPB Tien Phong Commercial Joint Stock Bank 14 VCB JSC Bank for Foreign Trade of Vietnam 15 VIB Vietnam International and Commercial Joint Stock Bank 16 VPB Vietnam Prosperity Joint Stock Commercial Bank Source: Summarized by the authors 24 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
14. NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU Appendix 2. Reclassified Assets and Liabilities Liquidity Catagories Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng 25
15. Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân hàng thương mại Việt Nam Source: Reclassified by the authors Appendix 3: The first correlation matrix between variables Source: Authors’ canculations from Stata software Appendix 4: The second correlation matrix between variables Source: Authors’ canculations from Stata software 26 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021