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THE DETERMINANTS OF LIQUIDITY RISK OF COMMERCIAL BANK IN VIETNAM Student name: Vu Ngoc Linh Subject: Dissertation in Financial Management (FTU) Tutor: Associate Professor Le Thai Phong

Table of Contents

Introduction ......................................................................................................... 3 Literature Review ................................................................................................ 3

Commercial bank in Vietnam ......................................................................................................................... 3 Liquidity, liquidity risk ..................................................................................................................................... 3 Bank management in Vietnam ....................................................................................................................... 4

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

Data and sample .................................................................................................................................................. 5 Research model ................................................................................................................................................. 5 Hypothesis ............................................................................................................................................................ 5

Timeline ............................................................................................................... 5 Bibliography ........................................................................................................ 7 Appendix ............................................................................................................. 9

Introduction

Within the commerce activities of each bank, three objectives: security, profitability, and liquidity are three objectives that have a near relationship with each other set by the bank administration. In specific, liquidity is extremely vital to the presence and advancement of banks. Liquidity from the point of view of a bank is caught on as the capacity to promptly meet customers' request for withdrawals at any time with the most reduced cost. This implies that whenever a customer has a need to pull back cash, the bank must guarantee that it is fulfilled promptly. That creates managers continuously have measures to degree, oversee and arrange the utilisation of capital into the bank so that both guarantee the benefit of assets and meet the request for withdrawals of customers with the least cost. It can be said that liquidity could be a exceptionally delicate issue within the trade activities of banks. A bank that's wiped out will rapidly come to the brink of liquidation and influences the solidness of the complete framework. This paper aims to examine the impacts of internal and external factors on the liquidity risk of the commercial banks of Vietnam, especially in three internal factors: bank’s size, ratio of bank’s capital and bank profitability (ROE) as well as one external factor is nation inflation rate. Therefore, I will give some recommendation to Vietnam’s commercial banks for the future.

Literature Review

Commercial bank in Vietnam

Commercial banks are sorts of banks that legitimately manage organizations, undertakings, financial associations, mass associations and people ... by taking deposits, reserve funds and utilizing that capital to loan, rebate, give methods for installment and give banking administrations. The fundamental elements of a business bank are: - Financial intermediation function - Credit intermediation: Mobilizing funding to give credit to borrowers (associations and people), direct loaning in the economy. - Creating cash: It is an inventive capacity to make a pen adding to expanding the money related volume of the economy. From the underlying collection, by methods for loaning by wire move, the business banking framework can make deposits (for example credit). - Production capacities: Including the preparation and utilization of assets to make banking items and administrations for the economy. As of now, Vietnamese commercial banks are partitioned into four groups : state owned banks, joint-stock banks, joint-venture banks and branches of foreign banks.

Liquidity, liquidity risk

Basel Committee (2015) characterized liquidity as the capacity of a bank to quickly meet its budgetary commitments caused during the time spent business activity. In this sense, liquidity speaks to subjective variables of the banks'

money related quality. The meaning of the Basel Committee on Banking Supervision shows that liquidity hazard happens when a monetary establishment needs money to meet its commitments without influencing its day by day business activity and budgetary circumstance. Subsequently, banks face an inability to supply adequate money for prompt liquidity requirements (for instance, can't change over resources into money or get to satisfy the installment need) or to raise liquidity at a significant expense.

Determinants of Liquidity risk

Laštůvková (2014) said that the bigger the bank is, the less liquidity it holds and more depends and gets it from the money related markets. It is associated with idea "too huge to come up short", where large banks know, that they are sufficiently large to be upheld by state or national bank. This idea is profoundly associated with fundamental hazard, the motivation behind why national banks and government are eager to help these banks even they can undermine the entire monetary part or national economy. However, it is disagreed by many other people that bank size is showed a negative effect on banks’ liquidity (studies of Aspachs

et al.,

2005; Bunda and Desquilbet, 2008; Hackethal

et al.,

2010; Horvath

et al.,

2012; Cucinelli, 2013; Lei and Song, 2013). Distinguin et al. (2013) study the relationship between capital and liquidity risk in quoted US and European banks and find that small banks increase their capital when they face higher illiquidity while Berger and Bouwman (2009) find that the relationship between liquidity risk and capital in US banks is positive for large banks and negative for small banks. The majority of studies proves that the impact of ROE on bank liquidity is positive (Vodová, 2011; Bonfim & Kim, 2011) but some researches show that ROE has an opposite effect on liquidity (for example Lucchetta, 2007)). Vodova (2011) infers that macroeconomic totals notably affect banks liquidity. Particularly, the inflation rate accept a falling apart position on the general economy, yet additionally on the banks liquidity, therefore there is a negative connection between high inflation rate and accessible liquidity for banks

Bank management in Vietnam

In Vietnam, there have been very little research papers relating factors affecting the liquidity of commercial banks. The most prominent research is that by Vu (2012). Vu (2012) considered the influence of the internal variables of commercial banks affecting liquidity with the sample of 37 Vietnamese commercial banks in the period from 2006 to 2011. Through statistical analysis, disproportionate correlation and regression of data with the fixed effect, the study found the impacts of some factors on liquidity. Specifically, the equity ratio, bad debt ratio and profit ratio positively correlated while the ratio of loans on deposits negatively correlated with the liquidity of Vietnamese commercial banks. This survey did not detect the impact of loan loss provision and the bank’s scale on the liquidity status. In addition, although several studies examine factors affecting the liquidity of

commercial banks, most of them use data of banks in foreign countries. There have been some recent studies using Vietnamese data. However, the authors of these studies examine only the influence of internal variables without considering macro economic variables.

Methodology

Data and sample

Data were collected from annual financial statements of 35 out of 38 commercial banks in Vietnam in the period from 2015 to 2019. All financial reports used in this research were published by the banks and audited by external auditors, which validates the accuracy of financial data used in the research.

Research model

LIQi,t = β0 + β1SIZEi,t+ β2CAPi,t + β3ROEi,t + β4INFi,t + εi,t In which LIQi, t: Ratio of bank liquidity i year t (liquid assets / total assets) Independent variables: SIZEi, t: Bank size i at time t (logarithm of total outstanding loan); CAPi, t: Ratio of bank capital i at time t (equity / total capital); ROEi, t: Bank's profitability i at time t (after-tax profit / total equity) INFt: Inflation rate in year t;

Hypothesis

H1: Bank size (SIZEi, t) has a negative impact on bank liquidity. H2: Capital ratio (CAPi, t) has the opposite effect on the bank's liquidity rate. H3: Profitability (ROEi, t) has a positive effect on liquidity. H4: INFt rate has a negative impact on bank liquidity.

Timeline

Week 1-3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Choose research’s topic Proposal draft 1st Proposal draft 2nd Proposal draft 3rd Proposal draft 4th Proposal draft 5th Proposal’s submission Final paper draft 1st Final paper draft 2nd

Week 12 Week 13 Week 14 Week 15 Week 16 Week 17 Week 18 Week 19 Week 20 Week 21 Week 22 Final paper draft 3rd Final paper draft 4th Final paper draft 5th Final paper draft 6th Final paper draft 7th Final paper draft 8th Final paper draft 9th Final paper draft 10th Final paper draft 11th Final paper draft 12th Final paper’s submission

Bibliography

Banks, E. (2005). Liquidity Risk: Managing Asset and Funding risk. Palgrave Macmillan. Basel Committee on Banking Supervision (2008). Principles for Sound Liquidity Risk Management and Supervision. Retrieved from https://www.bis.org/publ/bcbs144.pdf Bunda, I., & Desquilbet. J.-B.(2008). The bank liquidity smile across exchange rate regimes of 36 emerging countries commercial banks. International Economic Journal, 22(3), 361-386. Retrieved from http://jb.desquilbet.pages persoorange.fr/docs/Bunda_Des-quilbet_2008_IEJ.pdf Duttweiler, R. (2009). Managing Liquidity in Banks: A Top Down Approach. John Wiley & Sons Ltd. https://doi.org/10.1002/9781119206415 Fola, B. (2015). Factors affecting liquidity of selected commercial bank in Ethiopia (Ph.D. Thesis). Addis Ababa University. Retrieved from http://etd.aau.edu.et/bitstream/handle/123456789/2834/Belete%20Fola.pdf?sequence

=1&isAllowed=y ASPACHS, O., NIER, E., and TIESSET, M. 2005.

Liquidity, Banking Regulation and the Macroeconomy. Evidence on bank liquidity holdings from a panel of UK ‐ resident banks

. Bank of England Working Paper. BUNDA, I. and DESQUILBET, J. B. 2008. The bank liquidity smile across exchange rate regimes.

International Economic Journal

, 22(3): 361–386. CUCINELLI, D. 2013. The Determinants of Bank Liquidity Risk within the Context of Euro Area.

Interdisciplinary Journal of Research in Business

, 2(10): 51–64. HACKETHAL, A., RAUCH, C., STEFFEN, S., et al. 2010.

Determinants of Bank Liquidity Creation

. Social Science Research Network. HORVATH, R., SEIDLER, J. and WEILL, L. 2012. Bank capital and liquidity creation. Granger ‐ Causality evidence. In:

Working paper series – European Central Bank

, no. 1947. LAŠTŮVKOVÁ, J. 2014. Liquidity management strategies in the Czech banking sector. In:

MENDELU Working Papers in Business and Economics

47/2014. Brno: Mendel University in Brno. LEI, A. C. H. and SONG, Z. 2013. Liquidity creation and bank capital structure in China.

Global Financial Journal

, 24: 188–202. Berger, A. N., & Bouwman, C. H. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779-3837.
 Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking & Finance, 37(9), 3295-3317.


Vodova, P. (2011), Liquidity of Czech commercial banks and its determinants. International Journal of mathematical models and methods in applied sciences, 5(6), 1060-1067.

Lucchetta, M., “What Do Data Say About Monetary Policy, Bank Liquidity and Bank Risk Taking?”, Economic Notes by Banca Montedei Paschi di Siena SpA, vol. 36, no. 2, pp. 189-203, 2007.

Appendix

Ethical form

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