Factors affecting the liquidity risk of commercial banks in viet nam 2022

MINISTRY OF EDUCATION AND TRANDING STATE BANK OF VIETNAM BANKING UNIVERSITY HCMC LÊ KHÁNH LINH FACTORS AFFECTING THE LIQUIDITY RISK OF VIETNAMESE COMMERCIAL BANKS GRADUATION THESIS SPEACIALITY FINANCE.

GRADUATION THESIS SPEACIALITY: FINANCE –

BANKING CODE: 7340201

HO CHI MINH CITY, 2022

MINISTRY OF EDUCATION

AND TRANDING

BANKING UNIVERSITY HCMC

LÊ KHÁNH LINH

FACTORS AFFECTING THE LIQUIDITY RISK OF

COMMERCIAL BANKS IN VIETNAM

GRADUATION THESIS SPEACIALITY: FINANCE – BANKING

CODE: 7340201

Instructor

ASSOC.PROF PhD DANG VAN DAN

HO CHI MINH CITY, 2022

The topic name: Factors effecting the liquidity risk of commercial banks in Vietnam

The study's major objectives are to identify characteristics that explain liquidity risk in Vietnamese commercial banks and assess their impact on the risk Following that, many policy implications and proposals to improve banks' liquidity ability and prevent abrupt liquidity shocks will be presented The study's contents include the following: To begin, the study's emergence stems from a requirement among commercial banks to reduce liquidity risk in the face of increasing competition Secondly, the study examines existing domestic and international research on liquidity risk factors in order to use them as a theoretical foundation and to inherit the research models Thirdly, the research data was gathered from the financial reports of 31 Vietnamese commercial banks from 2009 to 2019 The author employs a wide range of techniques, including qualitative (description, comparison, analysis, etc.) and quantitative procedures Pooled OLS, FEM, REM, and FGLS models are used in particular to regress panel data in research

Finally, the analysis, remarks, and conclusion are all proven based on the research findings, in order to propose the author's proposals for avoiding liquidity risk in banks' operations The author expects that this study will serve as a reference in the future and that the research findings will be valuable to bank administrators, legislators, and other scholars

Keywords: Liquidity risk, FGLS, Profit, Joint Stock Commercial Bank, Vietnam

My name is Le Khanh Linh and I am a student at the Banking University of Ho Chi Minh City, class HQ6 – GE12, student number: 030134180237

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

I would like to thank the teachers and friends in the Banking University in Ho Chi Minh city and with the deepest gratitude, I would like to send to the personnel in the Department of Finance and Department of Banking the most sincerely thanks for the knowledge and dedication, who has devoted to us during our school time Especially

in the program of implementing the graduation dissertation with the guidance of association Professor and Doctor of Philosophy Dang Van Dan, I have been helped a lot in choosing the topic, writing the research, as well as in-depth guidance in how to work properly Finally, I would like to thank my family, friends and relatives who have always been there to support and encourage me to complete my graduation dissertation

I sincerely thank!

ABSTRACT I ASSURANCE LETTER II ACKNOWLEDGEMENT III LIST OF ACRONYMS VII LIST OF DIAGRAMS VIII LIST OF TABLES IX

CHAPTER I: INTRODUCTION 1

1.1 RESEARCH MOTIVATIONS 1

1.2 OBJECTIVES OF STUDY 2

1.2.1 General objective 2

1.2.2 Specific objective 2

1.3 RESEARCH QUESTION 3

1.4 SUBJECT AND SCOPE OF THE STUDY 3

1.4.1 Research Subject 3

1.4.2 Scope of the study 3

1.5 RESEARCH METHODOGY 4

1.6 CONTRIBUTIONS 5

1.7 DISSERTATION STRUCTURE 5

CHAPTER II: LITERATURE REVIEW 5

2.1 THEORY OF LIQUIDITY RISK OF JOIN-STOCK COMMERCIAL BANKS 8

2.1.1 Commercial banks 8

2.1.2 Bank liquidity risk 9

2.1.3 Liquidity risk measurement 11

2.1.4 Liquidity reserve 12

2.2 LITERATURE REVIEW 13

2.3 HYPOTHESES DEVELOPMENT 18

2.3.1 Internal hypotheses 18

2.3.2 External hypotheses 20

3.1 DATA COLLECTION: 24

3.2 RESEARCH MODELS 26

3.3 DESCRIPTION VARIABLE AND RESEARCH HYPOTHESIS 29

3.3.1 Dependent variable – Funding gap (FGAP) 29

3.3.2 The independent variables 29

3.3.3 Macro factors 32

3.4 RESEARCH PROCESS 35

3.5 RESEARCH METHODS 38

3.5.1 Ordinary Least Squares (OLS) 38

3.5.2 Fixed Effect Model (FEM) 39

3.5.3 Random Effect Model (REM) 39

3.5.4 Feasible Generalized Least Square (FGLS) 39

CHAPTER IV: RESEARCH RESULTS AND DISCUSSION 41

4.1 DESCRIPTIVE STATISTICAL 41

4.2 CORRELATION ANALYSIS OF VARIABLES 45

4.3 MULTICOLLINEARITY TEST 47

4.4 ESTIMATED THE POOLED OLS, FEM, REM MODELS 48

4.5 SELECTION TEST OF 3 MODELS POOLED OLS AND FEM 51

4.5.1 Model defect testing 52

4.5.2 Homoscedasticity test 52

4.5.3 Autocorrelation test 53

4.6 ESTIMATED THE FGLS 54

4.6.1 Comparison between models 55

4.7 RESULTS DISCUSSION 57

CHAPTER V: CONCLUSIONS AND RECOMMENDATIONS 68

5.1 CONCLUSION 68

5.2 RECOMMENDATION 71

5.2.1 For commercial banks 71

5.2.2 For the State Banks 72

5.3 LIMITS AND EXTENSIVE RESEARCHES 73

5.3.1 Limits of the research 73

5.3.2 Direction for extensive research 74

REFERENCES 75

APPENDIX 77

Acronyms English

FGLS Feasible Generalized Least Square

Figure 1 Thesis model 36

Figure 2 Relationship between FGAP and SIZE 56

Figure 3 Relationship between FGAP and LDR 58

Figure 4 Relationship between FGAP and TLA 59

Figure 5 Relationship between FGAP and LLR 60

Table 3.1 List of Commercial banks in Vietnam 22

Table 3.2 Summary of research on financial performance 31

Table 4.1 Summary of Descriptive statistics 39

Table 4.2 Correlation between FGAP and independent variables 43

Table 4.3 Multi-collinearity tests 44

Table 4.4 Estimated of Pooled OLS, FEM and REM 46

Table 4.5 Check for suitable model selection 48

Table 4.6 FGLS model results 52

Table 4.7 Regression results of 4 methods 53

Table 4.8 Papers with the same results 62

CHAPTER I: INTRODUCTION

In the bank-based financial system, the relationship between financial market liquidity and bank liquidity has been observed from a qualitative perspective under the impact of the financial crisis global mainstream As was the case in Vietnam, the world financial crisis affected the commercial banking system through its impact on the economy It can be seen that it is an extremely difficult period for the Vietnamese economy to face when economic growth falls to a very low level, inflation rises, production stagnates, purchasing power weakens, and unemployment falls increase

In parallel with the sharp decline of the stock market, the Vietnamese banking system has suffered a direct and strong impact, especially in terms of liquidity, from the perspective of the system as well as each individual bank Interest rates in the interbank market skyrocketed in the period 2010–2012 (Pham Thi Hoang Anh et al., 2015) The decline in asset quality caused bad debts to increase, credit growth and capital mobilization difficulties To attract depositors, commercial banks had to use a variety

of methods, including increasing interest rates, direct interest rate promotions, cash or inkind payments Competition for customers, a race in interest rates occurred throughout the system, interbank interest rates increased, and some commercial banks even fell into insolvency, such as: De Nhat Joint Stock Commercial Bank (JSC), Ficombank, TinnghiaBank and Saigon Industry and Trade Joint Stock Commercial Bank

Liquidity risk has an impact on a bank's performance as well as its reputation (Jenkinson, 2008) Furthermore, a low liquidity position may result in regulatory penalties As a result, maintaining a sound liquidity structure becomes critical for a

bank Liquidity risk has emerged as a major worry and challenge for banks in the modern period A bank with good asset quality, strong earnings, and sufficient capital may fail if it is not maintaining adequate liquidity

From that, it shows that the importance of assessing the liquidity risk of Vietnamese commercial banks at this stage is very important, because it helps managers to restructure the banking system effectively has a basis, orientation for merger and consolidation also has a scientific basis

Stemming from the above reasons, the author has chosen to carry out the research

topic "Factors affecting the liquidity risk of Vietnamese commercial banks" to

study to show the factors that have affected the liquidity risk of the Bank, besides, there are proposed methods to improve the liquidity of Vietnamese commercial banks

1.2 OBJECTIVES OF STUDY

1.2.1 General objective

The general objective of this study is to study the factors affecting the liquidity risk

of Vietnam joint stock commercial banks

1.2.2 Specific objective

Build models based on previous studies

Verify the impact of these factors on the liquidity risk of Vietnam Joint Stock Commercial Bank

Check the direction of impact

Proposing solutions and recommendations for joint stock commercial banks to improve the liquidity risk of Vietnam joint stock commercial banks, limiting the impact

on the liquidity risk of commercial banks

- How is the impact of the liquidity risk of Vietnamese commercial banks?

- Based on the research results, What’s the solutions to improve the liquidity risk

of Vietnamese commercial banks?

1.4 SUBJECT AND SCOPE OF THE STUDY

1.4.1 Research Subject

The object of this research is the financial capacity of commercial banks, the factors affecting the liquidity of commercial banks in Vietnam

1.4.2 Scope of the study

Data research was carried out on 31 Vietnam Joint Stock Commercial Banks The study used data collected from 2009-2019

- Methods of data collection: developing research models, designing research

samples and collecting data for research To have data for the research, the author used the method of collecting secondary data by taking the data published on the websites of commercial banks such as annual reports, cash flow statements, etc currency, business results, in the period 2009-2019

- Data processing method: In this study, quantitative research method was used

with the support of Stata software The author conducts regression analysis and tests on the acquired panel data in order to construct an appropriate model In particular, regression analysis of panel data using the least squares method (POOLED OLS), random effects method (REM), and fixed effects approach was employed in the study (FEM) The author employs test like Preusch, Pagan and the Hausman test to identify the best model based on panel data regression To deal with issues like variation of variable errors and autocorrelation, the study applies the feasible generalized least squares (FGLS) approach on panel data The author then employs the S-GMM strategy

to resolving endogenous issues

- Qualitative method: used to compare results from empirical analysis with

results from previous studies to explain research objectives and research questions

1.6 CONTRIBUTIONS

Theoretically, the thesis complements the building of a research model on liquidity risk of Vietnamese commercial banks Based on the most up-to-date database of banks' operations and appropriately selected research models, the study will show the importance of building a sound liquidity system

In practical terms, the research results of the thesis can be considered as a source of reference, a policy suggestion to help bank administrators and state management agencies assess liquidity risk What is the current situation in Vietnam? Along with that

is the scientific basis for commercial banks and the State Bank to propose appropriate policies to improve the operational efficiency of the banking industry

Chapter 2: LITERATURE REVIEW

Chapter 2 presents the theoretical basis of the Bank's financial performance, summarizes previous research models on the factors affecting the Bank's financial performance as a basis for building the research model in the next chapter

Chapter 3: RESEARCH METHODOLOGY

Based on the theoretical basis of Chapter 2, Chapter 3 mentions the research

model, research variables, research data, research methods, research processes used in

the thesis to obtain appropriate results consistent with the intended purpose

Chapter 4: RESEARCH RESULTS ANF DICUSSION

Chapter 4 conducts descriptive statistics of the variables in the model, and tests the

research model From that result, analyze the correlation between the variables in the

model and analyze the factors affecting the financial performance of the bank

Chapter 5: CONCLUSIONS AND RECOMMENDATIONS

This chapter evaluates the research results of the topic, limitations and future

development directions From there, recommendations are given to Commercial Banks

in Vietnam to avoid factors affecting the Bank's financial performance

CONCLUSION CHAPTER 1

The first chapter provided an overview of the study's topic The author has specified the research objectives, clearly defined the subject and scope of study, research methodologies, and ultimately the thesis structure, which includes five chapters, after examining the requirement of the research

CHAPTER II: LITERATURE REVIEW 2.1 THEORY OF LIQUIDITY RISK OF JOIN-STOCK COMMERCIAL BANKS 2.1.1 Commercial banks

According to Article 4 of the Law on Credit Institutions (Law No 47/2010/QH12),

a commercial bank is a place that does money business and provides financial and

credit services in accordance with the law

Commercial banks have formed and existed for hundreds of years, associated with

the development of the commodity economy The development of the trading system

and the development of the commodity economy have a great influence on each other

and complement each other When the commodity economy developed strongly to its

highest stage, the market economy, commercial banks also perfected and became

indispensable financial institutions

Commercial banks are one of the financial intermediaries that help to develop the

financial environment Banks' core activity is to transfer money from capital surplus to

capital shortage, enabling idle money to be fully utilized and earning profit available to

consumers and businesses that they might not be able to earn, or at least not for a long

time

Furthermore, banks build consumer creditworthiness by safeguarding money so

that good money is used for good loans and not wasted on bad loans In other words,

banks connect individuals, businesses, and other institutions, which helps to keep the

economy going

As a result, if banks fail, the overall economic system will collapse, and because banks and money are so important to the survival of not only economies but entire societies, they are highly regulated and must adhere to strict procedures and principles

2.1.2 Bank liquidity risk

2.1.2.1 Bank liquidity risk theory definition

There are many definitions of liquidity risk According to the Basel Committee, bank liquidity is defined as "a bank's liquidity is the ability of a bank to increase its assets and meet its debt obligations as they come due without incurring undue losses."

It can be understood that liquidity risk occurs when commercial banks are not able

to pay at a certain time, or have to mobilize capital at high costs to meet payment needs; or for other subjective reasons, cause the insolvency of commercial banks, which will lead to undesirable consequences (Duttweiler, 2009) From the definition of liquidity of a bank, so far, there are a number of different definitions of liquidity risk such as: according to Nguyen Dang Don: “Liquidity risk is a type of risk appearing in the case of a bank lack of ability to pay, not converting in time cash-generating assets

or the inability to borrow to meet the requirements of payment contracts” In easier terms, liquidity risk can be defined as the risk of being unable to liquidate a position timely at a reasonable price (Muranaga and Ohsawa, 2002)

Liquidity is considered an important factor in determining the safety of a bank's operations as well as the stability of the whole banking system Liquidity risk is contained within systematic risk When one bank experiences liquidity risk, it will have

a negative impact on liquidity risk on other banks, the extent and spread of liquidity risk, account is huge

2.1.2.2 Causes of liquidity risk

Many studies have been relatively consistent in showing that risk Liquidity risk may come from the asset or liability side, or from off-balance sheet activities of commercial banks' balance sheets (Valla and Escorbiac, 2006)

Goodhart (2008) assumed that there are two basic facets of liquidity risk: maturity transformation (the maturity of a bank’s liabilities and assets) and the inherent liquidity

of a bank’s assets (the extent to which assets can be sold without incurring a significant loss of value under any market condition)

According to Nguyen Van Tien (2010), there are three preconditions that cause banks to face frequent liquidity risks:

First, banks mobilize and borrow capital in a short time, then every week they repay them for a longer-term loan As a result, many banks face a mismatch in terms of maturity between assets and liabilities

Second, the sensitivity of financial assets to interest rate changes When interest rates rise, many depositors will withdraw their money and look for another deposit with a higher interest rate Those with credit needs will postpone or withdraw the entire credit limit balance at the agreed low interest rate

Thus, changes in interest rates simultaneously affect the flow of deposits as well as the flow of loans, and ultimately the bank's liquidity Thirdly, banks always have to meet their liquidity needs perfectly Liquidity problems will erode public confidence in banks

Another cause of influence that does not come from within but is influenced from without is called the "domino effect" (Tran et al., 2019) The effect is roughly understood as when banks have a close relationship with each other through transactions in the interbank market When a bank loses liquidity and faces bankruptcy

risk, other banks will also be affected The degree of the contagion depends on the size

of the transaction between banks In addition, when depositors withdraw money from a bank, others may assume that all other banks will also face liquidity difficulty and withdraw all money from these banks This phenomenon triggers the domino effect that causes trouble to the whole banking system

Vu Thi Hong (2015) uses data from 37 Vietnamese commercial banks in the period from 2006 to 2011 to study the factors affecting the liquidity risk of banks in Vietnam using FEM and REM models The results show that equity ratio, loan-to-deposit ratio, profit ratio and bad debt ratio affect liquidity In addition, the study also shows that the liquidity of the bank is guaranteed if the owner's equity is maintained stably

2.1.3 Liquidity risk measurement

Liquidity risk can be measured in two ways: funding gap and liquidity ratios According to Vodová (2013), liquidity gap is the difference between assets and capital for both the present and the future Liquidity ratios are different coefficients calculated from a bank's balance sheet, often used to predict the trend of liquidity

Up to now, there are four liquidity risk ratios commonly used in empirical research

by Aspachs et al (2005), Rychtárik (2009), Praet and Herzberg (2008):

This ratio provides general information about the liquidity of the bank That is of the total assets of the bank, what is the proportion of liquid assets? This ratio is high, meaning the liquidity of the bank is very good

1 - L2 =

Liquidity ratio: using liquid assets to measure liquidity, is very good However, this ratio is focused on how sensitive a bank is when choosing funding types (including money) deposits from households, businesses, and other financial institutions This ratio is similar to L1, which means that this ratio is high, which also shows that the bank's liquidity is good

Among the reserves to ensure liquidity for banks, there are two important sources that managers in banks must pay special attention to: primary reserves and secondary reserves (Duttweiler, 2009) Primary reserves are cash treasury items, deposits with the central bank and deposits with other banks These reserves are used for reserves as

regulated by the Central Bank and to meet the extraordinary cash needs of customers or

to make payments to other banks in making payments between banks

Primary reserves are items of cash in the Treasury, deposits with the Central Bank, and deposits with other banks These reserves are used for reserves as regulated by the Central Bank and to meet the extraordinary cash needs of customers or to make payments to other banks in making payments between banks

Secondary reserve: securities that can be easily converted into money, such as treasury bonds, bank acceptance papers, and so on Secondary reserves are used to support primary reserves This will provide for the customer's anticipated with drawl, inter-bank payment, and borrowing needs In addition to meeting seasonal and cyclical needs, secondary reserves are also an important source of additional resources to handle unexpected needs for withdrawals and large payments that banks cannot anticipate

Natural liquidity is created by a bank's assets with a specified maturity Artificial liquidity is created through the ability to convert assets to cash before maturity

The research of Chung-Hua Shen et al on bank liquidity risk and operational efficiency The study uses asymmetric panel data of commercial banks in 12 developed economies for the period 1994–2006 and uses the two-stage least squares (2SLS) regression method

The results show that liquidity risk is a decisive factor in the bank's performance Liquidity risk can reduce bank profitability because of the high cost of reserve funds

Truong Quang Thong (2013) investigated the determinants of liquidity risk by regressing a sample of 212 observations with a fixed-effect model His findings revealed that total assets have a non-linear impact on the bank's liquidity risk To begin with, an increase in assets results in a decrease in liquidity risk However, when total assets reach a certain level, the liquidity risk rises Furthermore, two factors have a significant impact on liquidity risk: the external funding dependence ratio and the liquidity reserve to total assets ratio

Dang Van Dan (2015) said that the financing gap represents a warning sign of a bank's future liquidity risk If the financing gap is positive and the bank has a large financing gap, then the bank will be forced to reduce cash reserves and reduce liquid assets or borrow additional money in the money market, leading to liquidity risk of the bank will rise

Saunders et al (1990) studied the relationship between bank ownership structure and risk acceptance based on the data of US banks in the period 1979 -1985 Using the Pooled OLS model for seven models corresponding to seven types of RRs with the same independent variables, the results show that the larger the foreign ownership ratio,

the higher the RR of the bank The ratio of equity / total assets is almost inverse with the RR of the bank, while the ratio of fixed assets / total assets tends to change depending on the period on the bank's risk

Foos et al (2010) used data from Bank scope from more than 10,000 private banks

in the period 1997–2005 to examine how loan growth affects bank risk through three hypotheses about the relationship between past loan growth and loan losses, bank profits, and solvency The author suggests that when bank lending activities thrive, it will lead to credit damage in the near future, as well as a reduction in the impact on interest income and capital ratio From there, the accumulated losses generate new risks, especially in the liquidity situation However, the study only focuses on 14 large countries, and it is easy to recover from the crisis, so it does not have a comprehensive view of the economy and the research period is quite short

According to research by Rose (2001), banks have good liquidity when they have a reasonable amount of available capital or can quickly raise capital through borrowing

or selling assets Commercial banks always keep a certain number of liquid assets in reserve on their balance sheets Measuring the proportion of these types of assets compared to the operational scale of commercial banks is considered a method to assess the liquidity of commercial banks

According to research by Munteanu (2012) data collected by 27 banks in Romania

in the years 2002-2010 aims to highlight the difference between crisis years The measures used in the study are Loans/Total Assets and Current Assets/Deposits and sources of short-term funding The results for the identified and different factors for the analyzed two-paying rule are consistent with previous literature of the same topic Previous empirical studies such as San and Heng (2013), Ongore & Kusa (2013) used different estimation methods to measure and evaluate the factors affecting the

financial performance of commercial banks These studies measure the financial performance of commercial banks by three financial metrics: Return on Equity (ROE), Return on Assets (ROA) and Net Interest Margin (NIM)

In 2006, Valla and Escorbiac also published the results of their study However, this study in essence also focuses on some internal and macro factors affecting the liquidity of banks in the UK as studied by Aspachs et al (2005)

Ibrahim, S S (2017) studies the effect of liquidity on profitability at commercial banks in Iraq in the period 2005–2013 The results of OLS regression analysis show that: The general ratio has a positive effect, while the quick ratio has a negative effect, implying that profits can be increased if short-term bank liquidity is guaranteed profits for the bank, but if in the short term, the bank holds too many assets that are instantly solvable, such as cash, demand deposits at other credit institutions, other assets on the market Besides payment ratios, a bank's liquidity management is also shown through a number of other indicators The capital adequacy ratio, the loan ratio, and the general ratio are used to test this problem The higher the loan and investment ratios, the more profitable the bank is, but for the capital adequacy ratio, if the bank keeps this ratio too high, the capital invested in low-risk business contracts will bring a low rate of return Ghenimi, A., Chaibi, H., & Omri, M A B (2020) study: liquidity risk determinants: Islamic banking versus conventional for the period 2005–2015 The results show that credit risk, ROE, liquidity gap, and CAR are common liquidity risk determinants in both banking systems These results can be explained by Islamic law (forbidden to pay or receive interest (Riba), the inefficiencies of Islamic money markets (lack of liquidity) and lack of diversification (banks in Islam in general are highly dependent on real estate) This therefore suggests that regulators should focus more on risk management strategy and management performance Therefore, Islamic

banks should manage this risk differently from conventional banks while complying with Islamic Sharia

Research by Nguyen Phuc Quy Thanh (2020) on the liquidity status and operational efficiency of 31 Vietnamese commercial banks, including state-owned commercial banks and private commercial banks (excluding joint-venture banks, 100% foreignowned banks, and bank branches) on foreign goods in the period 2005-2015 The thesis has focused on researching theoretical issues and non-parametric methods (DEA) in measuring efficiency and using the Tobit model to analyze the factors affecting the performance of 32 commercial banks Vietnam in the period 2007–2017

On the basis of qualitative analysis combined with quantitative analysis in evaluating the efficiency and determining the factors affecting the performance of commercial banks in Vietnam, the study can give some recommendations I propose to improve the operational efficiency and competitiveness of the current commercial banking system

in Vietnam in accordance with the requirements of innovation and the trend of international economic integration The thesis concludes that liquidity status has a positive impact on the performance of Vietnamese commercial banks during the research period When the liquidity status of commercial banks ensures the solvency of obligations when they come due without significant losses, it will contribute to improving the operational efficiency of banks But when this index is too high, it shows that a large amount of capital is not participating in the production process and causes waste for the bank to serve as a basis for providing solutions and recommendations to improve operational efficiency of Vietnamese commercial banks

2.3 HYPOTHESES DEVELOPMENT

2.3.1 Internal hypotheses

2.3.1.1 LLR – Provision for credit risk

Provision costs for credit losses reflect the quality of the loan or credit risk, if higher provision costs reflect reduced quality of loans and increased exposure to credit risk get a raise Truong Quang Thong (2013), Lucchetta (2007) found a positive correlation between the credit risk provision ratio and the liquidity risk of banks

H1: the ratio of provisions for credit risk to total outstanding loans has a positive effect on the bank's liquidity risk

2.3.1.2 LDR: Loan-to-deposit ratio

The higher this ratio means that the bank lends more than the capital it can mobilize Therefore, when facing liquidity risk, it will be difficult for banks to mobilize cheap capital if they lend too much, which reduces the bank's liquidity, which means increased liquidity risk When this ratio is low, banks can easily mobilize from different sources, such as the interbank market, issue valuable papers, etc., with cheap capital, which increases the bank's liquidity

H2: A positive relationship exists between liquidity risk and the loan/deposit ratio

2.3.1.3 CAP: Equity ratio

Banks use equity and debt to finance their business operations Unlike loans, which are payable in nature, equity is considered the bank's own funds, representing the ability to fend for themselves in the event of an accident The larger capital banks tend

to hold less liquid assets, so the greater the liquidity risk and vice versa This ratio represents the capital adequacy and the safety and financial soundness of a bank This

low ratio shows that the bank uses high financial leverage, which contains a lot of risks and can make the bank's profits decrease when the cost of debt is high An empirical study on the impact of the CAP variable on liquidity has different results such as: Thakor (1996), Bunda (2003), Rupullo (2003), Rupullo (2003), Rupullo (2003) 2003), Gorton & Huang (2004), Indriani (2004), Aspachs et al (2005), Inoca Munteanu (2012), Chikoko Laurine (2013), Gorton & Winton (2017) all show that equity over total assets has a positive relationship with liquidity account Therefore, we expect the equity ratio to be positively correlated with the bank's liquidity risk

H3: The equity ratio has a positive effect on the bank's liquidity risk

2.3.1.4 SIZE: Bank size

Size can show the economies of scale The large banks benefit from economies of scale which reduces the cost of production and information gathering (Boyd and Runkhle, 1993) The larger the total assets of a bank, the less liquidity risk it is exposed

to Large banks can rely on the interbank market, or on liquidity support from the lender of last resort (Vodava1, 2013) The results of some empirical studies show that size has a positive effect on liquidity (O Aspachs et al, 2005), (Chikoko Laurine, 2013) However, some studies have opposite results, size has a negative impact on liquidity (Bunda & Desquilbet, 2008), (Doriana Cucinelli, 2013), (Vodová P, 2013) From the above theories, arguments and empirical research results, the author hypothesizes about the positive relationship between asset size and liquidity of banks H4: There exists a positive effect between liquidity risk and bank size

2.3.1.5 TLA: Total loans ratio

TLA shows the percentage of total loans in relation to total assets Since loans are illiquid assets, a high TLA ratio indicates that the number of liquid assets held by banks

is low and banks easily experience liquidity problems

H5: Total loans ratio has a positive relationship with liquidity risk

2.3.1.6 ROE – Return on Equity

This coefficient is measured by taking after-tax profits on the total equity, which reflects the bank's management effectiveness in the use of equity The bank's profits are mainly generated from traditional businesses, which is the interest rate difference between lending and capital mobilization Therefore, the more assets a bank hold to meet its liquidity needs, the lower its profitability will be and vice versa (Aspachs et al, 2005)

H6: Return on equity ratio has a positive effect on the bank's liquidity risk

2.3.1.7 Net interest margin (NIM)

Interests receivables (by borrowers), Interests incurred (paid by the bank to the creditors and depositors) NIM indicates the efficiency of financial intermediation (Hamadi and Awdeh, 2012)

H7: Marginal interest income has a positive effect on the bank's liquidity risk

2.3.2 External hypotheses

2.3.2.1 INF -Inflation Rate

Inflation rate is one of the important macro factors in the economy, the INF both shows the trend of the economy and is an indicator for the State Bank to adjust

economic policies in line with the trend direction of the economy during that period Research by Moussa, M.A.B (2015), Truong Quang Thong (2013), Samuel Siaw (2015) and Tran Thi Thanh Dieu (2020) shows that there is a positive impact between the inflation rate and the bank's liquidity risk

H8: Inflation rate has a positive relationship with liquidity risk

2.3.2.2 GDP - Economic growth rate

Economic growth index is one of the macro factors affecting all business activities

of all economic sectors, if the high economic growth rate shows that the business activities of the economic sectors are better Therefore, promoting high lending activities increases credit balance and effective loan recovery, reducing credit risks

Research by Vodova Pavla (2011) and Tran Thi Dieu Thanh (2020) has a positive relationship between economic growth rate and bank liquidity risk In contrast, the study of Moussa, MAB (2015), Truong Quang Thong (2013), Samuel Siaw (2015), Godfrey Marozva (2016) has a negative impact between economic growth rate and liquidity risk of banks row

H9: Economic growth rate has a positive relationship with liquidity risk

2.3.2.3 M2: Money supply

Also known as the total means of payment, includes: the amount of cash in circulation, term deposits, demand deposits and savings deposits of individual and corporate customers at credit institutions On the balance sheet of the State Bank, money supply M2 is a liability and assets are the factors affecting money supply In addition, money supply is also a factor for the State Bank to control inflation and stabilize the money market

Research by the authors: Truong Quang Thong (2013), Vodova Pavla (2011) and

Tran Thi Thanh Dieu (2020) show that there is a positive relationship between money

supply ratio and liquidity risk of banks

H10: Money supply has a positive relationship with liquidity risk

CONCLUSION CHAPTER 2

In chapter 2, the author introduced the theoretical foundations of liquidity, liquidity risk and the impact of liquidity risk on bank operations The determinants of liquidity risk are also illustrated specifically, including internal and external factors In this chapter, the author also mentions previous studies to see the impact that these factors have on liquidity risk

CHAPTER III: RESEARCH METHODS 3.1 DATA COLLECTION:

We use a data set of Vietnamese commercial banks produced annually between

2009 and 2019 to study the factors affecting the liquidity risk of commercial banks During the study period, this sample excludes banks that were acquired by the State Bank of Vietnam, as well as merged and consolidated banks These banks' operations are subject to huge oscillations that take longer to normalize and their financial statistics may change drastically Furthermore, banks with missing data for the previous five years are excluded from the sample After all was said and done, 31 commercial banks were obtained Vietstock collects financial data from banks

Table 3.1 List of Commercial banks in Vietnam

3 BAB Bac A Commercial Joint Stock Bank (BaoViet Bank)

4 BID Joint Stock Commercial Bank For Investment And

Development of Vietnam (BIDV)

5 BVB Bao Viet Joint Stock Commercial Bank (BaoViet Bank)

6 CTG Vietnam Joint Stock Commercial Bank For Industry

and Trade (Viettin Bank)

7 DAF Dong A Commercial Joint Stock Bank (Dong A Bank )

8 EIB Vietnam Export Import Commercial Joint Stock Bank

(Eximbank)

Commercial Bank (HDBank)

(Kienlongbank)

11 LPB Lien Viet Post Joint Stock Commercial Bank

(LienVietPostBank)

12 MBB Military Commercial Joint Stock Bank (MB)

13 MSB Vietnam Maritime Commercial Joint Stock Bank

(MSB)

14 NAB Nam A Commercial Joint Stock Bank (Nam A Bank )

17 PGB Petrolimex Group Commercial Joint Stock Bank (PG

Bank)

20 SEA Southeast Asia Commercial Joint Stock Bank

(SeABank)

21 SGB SaiGon Bank For Industry and Trade (SAIGONBANK)

22 SHB SaiGon – HaNoi Commercial Joint Stock Bank (SHB)

23 STB SaiGon Thuong Tin Commercial Joint Stock Bank

(Sacombank)

24 TCB Vietnam Technological And Commercial Joint Stock

Bank (Techcombank)

25 TPB Tien Phong Commercial Joint Stock Bank (TPBank)

(VietABank)

27 VBB Vietnam Joint Stock Commercial Bank (Vietbank)

Bank (Viet Capital Bank)

29 VCB JointStock Commercial Bank For Foreign Trade Of

will be researched The data is collected from audited financial statements and posted

on the websites of commercial banks and some other financial information sites The study was carried out over a 10-year period from 2009 to 2019

Research on liquidity is very important for financial markets and banks, especially since the 2008 economic crisis According to Aspachs (2005) and Nikolau (2009), liquidity is not solely dependent on objective external factors that are important (such

as efficient markets, infrastructure, low transaction costs, a large number of buyers and sellers, and the transparency of transactional assets) Importantly, it is influenced by internal factors, especially the reactions of market participants in the face of uncertainty and changes in asset values Until now, research by some authors, such as Aspachs et al (2005), Rychtárik (2009), Praet and Herzberg (2008), has only focused on adjusting the internal liquidity ratios within banks

According to the research of author Dang Van Dan (2013), the funding gap method

is the most appropriate method in quantitative research The funding gap index reflects the most basic aspect of a bank's liquidity

Besides, the research paper "Factors affecting liquidity risk of Vietnam's commercial banking system" by author Truong Quang Thong (2013) also shows that,

in addition to internal factors of banks, such as size of total assets, ratio of liquidity reserve to total assets, interbank lending to total assets, dependence on external funding sources, ratio of equity to total capital, provision credit risk on total outstanding loans, external factors such as economic growth, inflation in the economy, and money supply

in the economy are also factors affecting the liquidity of Vietnam's commercial banking system

Most research results suggest that, in order to ensure the best liquidity risk management, comes from balancing internal and external factors However, external

factors also contribute to important support for liquidity in an account Therefore, the following study emphasizes the importance of the impact of macro factors as well as industry-wide indexes in reducing liquidity risk Inheriting the above studies and applying the funding gap method, we get the following model:

FGAP it = α+ β1LDR it + β2CAP it + β3NIM it + β4SIZE it + β5TLA it + β6ROE it + β7LLR it β8AGDP t + β9CR3 t β10INF t + β11M2 t + β12GDP t + ε it

In which: FGAPit is funding gap (liquidity gap), equal to average total credit

balance minus average total mobilized capital, this index measures the liquidity risk of commercial banks

α = Intercept

LDRit = Loan to deposit ratio of bank i at time t

CAP it = Equity capital of Bank i at time t

NIMit = Net Interest Margin of bank i at time t

SIZE it = Bank size of bank i at time t

TLAit = loan-to-total assets ratio of bank i at time t

ROEit = return on equity i at time t

LLRit = Loan loss reserves of bank i at time t

AGDP t = Industry growth at time t

CR3 t = Industry concentration at time t

INF t = Inflation rate at time t

M2 t = Money supply at time t