Dynamics of Capital Structure, Risk-Taking Behavior, and Profitability across the Vietnamese Banking System: Evidence from a Panel Vector Autoregression

  • Minh Phu PHAM Department of Sector and Field Economics, Central Institute for Economic Management (CIEM), Ba Dinh district, Hanoi, Vietnam
  • Cuong Van HOANG Department for Social Issues Studies, Central Institute for Economic Management (CIEM), Vietnam
  • Chung Kim TRAN Central Institute for Economic Management (CIEM), Vietnam
  • Hung Van VU Thuong Mai University (TMU), 79 Ho Tung Mau Street, Cau Giay district, Hanoi city Vietnam
  • Nga Thuy Thi LE Faculty of Political Theory, Trade Union University (TUU), 169 Tay Son street, Dong Da district, Hanoi city, Vietnam
  • Bo Cong NGUYEN Greenwich University, Nam Tu Liem district, Hanoi city, Vietnam

Abstract

The paper examines the interdependence between the profitability, risk-taking behavior, and capital structure across the Vietnamese banking sector, using panel vector autoregression with quarterly data of the 22 banks over 2014Q1–2019Q3. The outcomes indicate profit or solvency shock increases leverage, while the profit and solvency respond negatively to the leverage shock and their movement over time path is pretty similar. This reflects that the insolvency risk is sensitive to the wellbeing volatility due to the weak capital.


Moreover, the forecast variance in the leverage is mainly predicted by the profitability shock, while that of solvency is by the leverage one. The estimated variance in prosperity is mainly explained by the inefficiency shock. Thus, regarding policy recommendations, in the long run, Vietnamese financial regulators need to be continuously consistent with capital strength-supporting policies. However, other policies facilitating an effective financial environment are also simultaneously established to help banks minimize operating costs for higher management efficiency and thereby profitability. This supports the banks to partially offset the negative impact of increased capital which might reduce their profitability. Finally, strengthened supervision policies are also necessary, especially when the banks are more profitable because they intentionally relax borrowing and leverage restrictions.


 

References

[1] Abrigo, M.R.M., and Love, I. 2016. Estimation of panel vector autoregression in Stata. The Stata Journal, 16(3): 778-804.
[2] Barth, J.R., Caprio Jr, G., and Levine, R. 2008. Bank regulations are changing: for better or worse? Comparative Economic Studies, 50(4): 537-64.
[3] Batten, J.A., and Vo, X.V. 2016. Bank risk shifting and diversification in an emerging market. Risk Management, 18(4): 217-35.
[4] Batten, J. and Vo, X.V. 2019. Determinants of bank profitability. Evidence from Vietnam. Emerging Markets Finance & Trade, 55(6): 1417-28.
[5] Berger, A.N., and De Young, R. 1997. Problem loans and cost efficiency in commercial banks. Journal of Banking Finance Research Letters, 21(6): 849-70.
[6] Blum, J. 1999. Do capital adequacy requirements reduce risks in banking? Journal of Banking Finance, 23(5): 755-71.
[7] Bryce, C., Dadoukis, A., Hall, M., Nguyen, L., and Simper, R. 2015. An analysis of loan loss provisioning behaviour in Vietnamese banking. Finance Research Letters, 14: 69-75.
[8] Burger, A., Damijan, J.P, Kostevc, Č., and Rojec, M. 2017. Determinants of firm performance and growth during economic recession: The case of Central and Eastern European countries. Economic Systems, 41(4): 569-90.
[9] Calem, P., and Rob, R. 1999. The impact of capital-based regulation on bank risk-taking. Journal of Financial Intermediation, 8(4): 317-52.
[10] Chen, M., Wu, J., Jeon, B.N., and Wang, R. 2017. Monetary policy and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 31: 116-40.
[11] Chortareas, G.E., Girardone, C., and Ventouri, A. 2012. Bank supervision, regulation, and efficiency: Evidence from the European Union. Journal of Financial Stability, 8(4): 292-302.
[12] Delis, M.D., Hasan, I., and Tsionas, E.G. 2014. The risk of financial intermediaries. Journal of Banking Finance,44: 1-12.
[13] Demsetz, R.S., Saidenberg, M.R., and Strahan, P.E. 1996. Banks with something to lose: The disciplinary role of franchise value. Economic Policy Review, 2(2): 1-14.
[14] Djatche, M.J.N. 2019. Re-exploring the nexus between monetary policy and banks' risk-taking. Economic Modelling, 82: 294-307.
[15] Gropp, R., Heider, F. 2010. The determinants of bank capital structure. Review of Finance, 14(4): 587-622.
[16] Ha, N.T.T., and Phan, G.Q. 2018. The impact of funding liquidity on risk-taking behavior of Vietnamese banks: Approaching by Z-Score measure. International Journal of Economics Financial Issues, 8(3): 29-35.
[17] Ha, N.T.T., and Quyen, P.G. 2018. Monetary policy, bank competitiveness, and bank risk-taking: Empirical evidence from Vietnam. Asian Academy of Management Journal of Accounting Finance, 14(2): 137-56.
[18] Harris, M., Opp, C.C., and Opp, M.M. 2014. Higher capital requirements, safer banks? Macroprudential regulation in a competitive financial system. Paper presented at the Macroprudential Regulation in a Competitive Financial System, March 11.
[19] Holtz-Eakin, D., Newey, W., and Rosen, H.S. 1988. Estimating vector autoregressions with panel data. Econometrica, 56(6): 1371-95.
[20] Jacques, K., and Nigro, P. 1997. Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach. Journal of Economics and Business, 49(6): 533-47.
[21] Jensen, M., and Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305-60.
[22] Jensen, M.C. 1986. Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2): 323-29.
[23] Jouida, S. 2018. Diversification, capital structure and profitability: A panel VAR approach. Research in International Business Finance, 45: 243-56.
[24] Keeley, M.C. 1990. Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5): 1183-200.
[25] Keeton, W.R., and Morris, C.S. 1987. Why do banks’ loan losses differ? Economic Review, 72(5): 3-21.
[26] Le, T.P.V., and Phan, T.B.N. 2017. Capital structure and firm performance: Empirical evidence from a small transition country. Research in International Business Finance, 42: 710-26.
[27] Lepetit, L., and Strobel, F. 2013. Bank insolvency risk and time-varying Z-score measures. Journal of International Financial Markets, Institutions Money, 25: 73-87.
[28] Martynova, N., Ratnovski, L., and Vlahu, R. 2019. Bank profitability, leverage constraints, and risk-taking. Journal of Financial Intermediation, 100821.
[29] Modigliani, F., and Miller, M.H. 1963. Corporate income taxes and the cost of capital: a correction. The American Economic Review, 53(3): 433-43.
[30] Molyneux, P., and Thornton, J. 1992. Determinants of European bank profitability: A note. Journal of Banking Finance, 16(6): 1173-78.
[31] Myers, S.C., and Majluf, N.S. 1984. Corporate financing and investment decisions when firms have information that investors do not have (0898-2937). Retrieved from United States: National Bureau of Economic Research.
[32] Nguyen, D.T.T., Diaz-Rainey, I., and Gregoriou, A. 2014. Determinants of the capital structure of listed Vietnamese companies. Journal of Southeast Asian Economies, 31(3): 412-31.
[33] Nguyen, D.T., and Nguyen, H.T.K. 2018a. Does a Higher Level of Capital Ensure Lower Risk for a Bank? Evidence from the Vietnamese Banking System. Malaysian Journal of Economic Studies, 55(2): 245-65.
[34] Nguyen, H.T.K., and Nguyen, D.T. 2018b. Globalization and bank performance in Vietnam. Malaysian Journal of Economic Studies, 55(1): 49-70.
[35] Nguyen, H.P. 2019. Profitability of Vietnamese Banks under Competitive Pressure. Emerging Markets Finance & Trade, 55(9): 2004-21.
[36] Nguyen, N.V.H., and Le, H.T. 2017. Impacts of monetary policy on commercial banks’ profits: The case of Vietnam. Asian Social Science, 13(8): 32-40.
[37] Nguyen, T.V.H., et al. 2020. Excess liquidity and net interest margins: Evidence from Vietnamese banks. Journal of Economics and Business. 105893.
[38] Nguyen, T.P.T., Nghiem, S.H., and Roca, E. 2016. Management behavior in Vietnamese commercial banks. Australian Economic Papers, 55(4): 345-67.
[39] Nguyen, T.H.V., and Le, P.T.D.T. 2016. Effects of bank capital on profitability and credit risk: the case of Vietnam’s commercial banks. Journal of Economic Development, 23(4): 117-37.
[40] Shrieves, R.E., and Dahl, D. 1992. The relationship between risk and capital in commercial banks. Journal of Banking Finance, 16(2): 439-57.
[41] Thanh, L.T., and Huong, D.M. 2016. Determinants of capital structure: An empirical study on Vietnamese listed firms. Serbian Journal of Management, 12(1): 77-92.
[42] Uhde, A., and Heimeshoff, U. 2009. Consolidation in banking and financial stability in Europe: Empirical evidence. Journal of Banking Finance, 33(7): 1299-311.
[43] Vo, X.V. 2017. Determinants of capital structure in emerging markets: Evidence from Vietnam. Research in International Business Finance, 40: 105-13.
[44] Vo, X.V. 2018. Do firms with state ownership in transitional economies take more risk? Evidence from Vietnam. Research in International Business and Finance, 46: 251-56.
Published
2019-12-30
How to Cite
PHAM, Minh Phu et al. Dynamics of Capital Structure, Risk-Taking Behavior, and Profitability across the Vietnamese Banking System: Evidence from a Panel Vector Autoregression. Journal of Advanced Research in Law and Economics, [S.l.], v. 10, n. 8, p. 2474 – 2489, dec. 2019. ISSN 2068-696X. Available at: <https://journals.aserspublishing.eu/jarle/article/view/5293>. Date accessed: 24 apr. 2024. doi: https://doi.org/10.14505/jarle.v10.8(46).25.