The impact of liquidity creation on bank profitability empirical evidence from vietnamese commercial banks 2022

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY  NGUYỄN NGỌC THANH TRÚC THE IMPACT OF LIQUIDITY CREATION ON BANK PROFITABILITY EMPIRICAL EVIDENCE FRO.

CODE: 7340201

CODE: 7340201

SUPERVISOR NGUYỄN DUY LINH, Ph.D

Ho Chi Minh City, …/…/2022 Supervisor

Ph.D Nguyễn Duy Linh

ABSTRACT

Research data: The final thesis will focus on studying the impact of

liquidity creation on the profitability of twenty-three commercial banks in Vietnam

in the period from 2009 to 2020 Reliable secondary data are extracted from the financial statements of commercial banks previously disclosed to the public

Purpose: To build a regression model to estimate the impact of liquidity

creation represented by the “cat fat” measure on bank profitability, the research on the topic aims to investigate and find the impact of liquidity creation on the profitability of commercial banks in Vietnam Several variables represent bank characteristics including bank size, capital ratio, debt ratio, deposit ratio, expense ratio, provision ratio, real GDP growth rate, and treasury bill interest rate In particular, the author performed regressions on the components of liquidity creation and examined each one affected bank profitability Including research variables such as liquidity creation, bank-specific variables, and macro variables Based on the collected data on the factors, the study examines the impact of these factors on the performance of twenty-three commercial banks in Vietnam, including two variables: depends on return on assets (ROA) and return on equity (ROE)

Design/methodology/approach: The authors examined how liquidity

creation influences the profitability of commercial banks in Vietnam from 2009 to

2020 by constructing regression models for regression analysis The multivariate regression models used are the Pooled Ordinary Least Squares (POLS) method, the Fixed Effects Model (FEM), and the Random Effects Model (REM), respectively Finally, the author uses the Feasible Generalized Least Squares (FGLS) method to overcome the phenomena

Findings: Using panel data for the period 2009-2020, the research results

show the negative impact of liquidity creation on bank profitability in Viet Nam,for both dependent variables, ROA and ROE In nine independent variables, in each ROA and ROE model, only six variables affect the regression model while the other

three variables have no significant influence

Implications: With the results achieved, it will help banks and other related

agencies to evaluate, manage and operate more effectively, as well as contribute to

an empirical study for the future Assist them in identifying key variables influencing bank profitability in Vietnam, particularly the influence of liquidity creation The findings will support banks and other associated agencies in better evaluating, managing, and running their businesses and provide an empirical study for future research

Keywords: Commercial banks, profitability, ROE, bank size, capital, loans,

deposits, loan ratio, deposit ratio, GDP growth, treasury bill rates, liquidity creation

COMMITMENT

My graduation thesis titled "The impact of liquidity creation on bank

profitability: Empirical evidence from Vietnamese commercial banks" is my

research work in the past time The article is made with the guidance and dedicated help of Ph.D Nguyen Duy Linh The topic is my result after studying and accumulating knowledge at Banking university of Ho Chi Minh City

The author's research work and the research results are honest The reference part of the thesis clearly states the material and data used in the research work

The substance of the thesis, as well as the results and software program, are done honestly and plainly and have never been published before

Ho Chi Minh City, …/…/2022

Author

Nguyễn Ngọc Thanh Trúc

ACKNOWLEDGEMENTS

To complete this final thesis, I would like to thank the lecturers of Banking University of Ho Chi Minh City Especially the teachers who majored in Finance and Banking during the years of studying here have taught me valuable knowledge

as a foundation for my career and later life I would like to express my sincere thanks to Ph.D Nguyen Duy Linh, who has always accompanied and supported me during my research work Thanks to that, the research was completed on schedule and completed my graduation thesis most conveniently

In addition, I would also like to share my joy and express my gratitude to my family and friends who have always supported and encouraged me throughout the process of writing this thesis In the process of implementing the thesis, due to the limitations of knowledge, shortcomings are inevitable I look forward to receiving suggestions from teachers, and friends to improve the topic At the same time, it creates a better premise and a direction for future research

Finally, I would like to wish the lecturers always have good health, and happiness and always achieve much success in their work as well as in their lives

Sincerely thanks!

Ho Chi Minh City, …/…/2022

Author

Nguyễn Ngọc Thanh Trúc

TABLE OF CONTENTS

ABSTRACT i

COMMITMENT iii

ACKNOWLEDGEMENTS iv

TABLE OF CONTENTS v

LIST OF ABBREVIATIONS ix

LIST OF FIGURES x

LIST OF TABLES xi

CHAPTER 1: INTRODUCTION 1

1.1 BACKGROUND OF THE RESEARCH 1

1.2 OBJECTIVES OF THE RESEARCH 4

1.2.1 General objectives 4

1.2.2 Specific objectives 4

1.3 RESEARCH QUESTIONS 4

1.4 RESEARCH SUBJECTS AND SCOPE 4

1.4.1 Research subject 4

1.4.2 Research scope 5

1.5 RESEARCH METHODOLOGY 5

1.6 CONTRIBUTION OF THE RESEARCH 6

1.6.1 Literature gap 6

1.6.2 New contributions 7

1.7 STRUCTURE OF THE RESEARCH 7

CONCLUSION CHAPTER 1 9

CHAPTER 2: THEORETICAL BASIS AND LITERATURE REVIEW 10

2.1 DEFINITION OF COMMERCIAL BANK 10

2.2 PROFITS OF COMMERCIAL BANKS 10

2.2.1 The concept of bank profitability 10

2.2.2 Profit measurement criteria of commercial banks 11

2.3 CREATE LIQUIDITY OF COMMERCIAL BANKS 13

2.3.1 Definition of liquidity creation of commercial banks 13

2.3.2 Liquidity creation theories 13

2.3.3 Create liquidity and metrics 15

2.3.3.1 The role of creating liquidity with commercial banks 15

2.3.3.2 Indicator for measurement of liquidity creation 16

2.3.3.3 Steps to calculate liquidity creation variable 17

2.4 EMPIRICAL STUDIES ON THE IMPACT OF LIQUIDITY CREATION ON BANK PROFITABILITY 20

2.4.1 Domestic studies 20

2.4.2 Foreign studies 22

2.5 OTHER FACTORS AFFECTING THE PROFITABILITY OF COMMERCIAL BANKS 25

2.5.1 Bank-specific factors 25

2.5.2 Macro factors 27

CONCLUSION CHAPTER 2 29

CHAPTER 3: METHODOLOGY 30

3.1 RESEARCH PROCESS 30

3.2 RESEARCH MODEL AND RESEARCH HYPOTHESIS 32

3.2.1 Research model 32

3.2.2 Research hypothesis 33

3.3 DATA COLLECTION 42

CONCLUSION CHAPTER 3 43

CHAPTER 4: RESEARCH RESULTS AND DISCUSSION 44

4.1 DESCRIPTIVE STATISTICS RESULT FROM THE VARIABLES 44 4.1.1 Return on total assets (ROA) 46

4.1.2 Return on equity (ROE) 47

4.1.3 Liquidity creation (LC) 48

4.1.4 Bank size (SIZE) 51

4.1.5 Capital ratio (CAP) 53

4.1.6 Total loans and leases to total assets (LOANS) 54

4.1.7 Deposit ratio (DEP) 55

4.1.8 Cost-to-income ratio (COST) 56

4.1.9 Loan loss provisions (LLP) 57

4.1.10 The annualized growth rate of real GDP (GDP) 59

4.1.11 Treasury bill rates (TB) 60

4.2 CORRELATION ANALYSIS 61

4.3 MULTI-COLLINEARITY TEST 62

4.4 REGRESSION ANALYSIS 64

4.4.1 Estimated the POOLED OLS, FEM, REM models 64

4.4.2 POOLED OLS, FEM, and REM model selection test 68

4.5 HETEROSCEDASTICITY AND AUTOCORRELATION TEST 70

4.6 FIX RESEARCH MODELS 71

4.7 DISCUSSING RESEARCH RESULTS 71

4.7.1 Liquidity creation (LC) 72

4.7.2 The asset – side liquidity creation (LCA) 73

4.7.3 The liabilities – side liquidity creation section (LCL) 74

4.7.4 The off-balance sheet – side liquidity creation section (LCOBS) 74

4.7.5 Bank size (SIZE) 75

4.7.6 Capital ratio (CAP) 75

4.7.7 Total loans and leases to total assets (LOANS) 76

4.7.8 Deposit ratio (DEP) 76

4.7.9 Cost-to-income ratio (COST) 76

4.7.10 Loan loss provisions (LLP) 77

4.7.11 The annualized growth rate of real GDP (GDP) 78

4.7.12 Treasury bill rates (TB) 78

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 80

5.1 CONCLUSIONS 80

5.2 SOME RECOMMENDATIONS TO IMPROVE PROFITABILITY 82 5.3 LIMITATION OF THE THESIS AND FUTURE RESEARCH DIRECTION 85

5.3.1 Limitation of the thesis 85

5.3.2 Future research direction 85

CONCLUSION CHAPTER 5 86

REFERENCES 87

APPENDIX 96

LIST OF ABBREVIATIONS

FGLS Feasible Generalized Least Square

LC Liquidity Creation by “cat fat” divided by total assets LCA The asset–side liquidity creation

LCL The liabilities–side liquidity creation section LCOBS The off-balance sheet–side liquidity creation section

LIST OF FIGURES

Figure 3.1 Research process 30

Figure 4.1 Average profitability ratio of Vietnamese commercial banks in the period 2009-2020 46

Figure 4.2 Average return on equity of Vietnamese commercial banks over the years 47

Figure 4.3 Average ratio of liquidity creation to total assets of Vietnamese commercial banks over the years 49

Figure 4.4 Average value of liquidity created in the period 2009-2020 50

Figure 4.5 Asset size of banks in 2009 and 2020 51

Figure 4.6 Average asset size of banks over the years 2009-2020 52

Figure 4.7 Size of equity on average total assets of banks 53

Figure 4.8 Ratio of Total loans and leases to total assets by year 54

Figure 4.9 Ratio of deposits to total assets of banks 52

Figure 4.10 Total operating costs over total assets of banks 56

Figure 4.11 Provision level and credit risk provision ratio of banks in 2020 57

Figure 4.12 GDP growth rate of Vietnam in the period 2009-2020 60

Figure 4.13 Treasury bill interest rates over the years 61

LIST OF TABLES

Table 2.1 Classification of assets and equity on and off the balance sheet of

Vietnamese commercial banks by liquidity 18

Table 2.2 Cat fat measure of LC 19

Table 3.1 List of variables 41

Table 4 1 Descriptive statistics results of the variables in the model 45

Table 4.2 Descriptive statistical results of the variables in the model 62

Table 4.3 Multi-collinearity VIF model (1), (2) 63

Table 4.4 Multi-collinearity VIF model (3), (4) 63

Table 4.5 Multi-collinearity VIF fixed after removing the DEP variable from the model (3), (4) 64

Table 4.6 Estimated Model 1 (Pooled OLS, FEM and REM) 65

Table 4.7 Estimated Model 2 (Pooled OLS, FEM and REM) 66

Table 4.8 Estimated Model 3 (Pooled OLS, FEM and REM) 67

Table 4.9 Estimated Model 4 (Pooled OLS, FEM and REM) 68

Table 4.10 F-Test to choose OLS or FEM model 69

Table 4.11 Table of Hausman test results of four models with dependent variables ROA, ROE 69

Table 4.12 Heteroscedasticity and autocorrelation test results 70

Table 4.13 Estimated FGLS models 72

CHAPTER 1: INTRODUCTION

In this first chapter, the author will present the reasons for choosing this research topic In addition, the objectives and scope of research in this field are also stated and related questions are raised The author will also determine the research object and how long the research will be Finally, the proposed outline for the study

is presented

Commercial banks are an important intermediary financial institution for the economy of each country Banks serve as payment mediators, assisting in the transfer of funds from a state of surplus to a state of scarcity The commercial banking system ensures financial supply for the economy and works capital and distributes capital to guarantee that a country's finances grow steadily and sustainably Therefore, the banking industry has always been concerned by the State

so that it can continuously update developments and make appropriate adjustments

in the context of constantly changing financial markets The State Bank and the government pay particular attention to the banking process and ensure that suitable and timely supervision and monitoring strategies are implemented It is because of the necessity and implementation of many important functions that commercial banks concentrate in the banking industry in Vietnam

In recent years, in Vietnam, in the period of accelerating development and integration into the world economy That contributes to promoting the rapid development of the banking system in terms of scale to promptly and comprehensively meet the needs of the economy Therefore, in the economy in general and commercial banks in Vietnam in particular, they are very focused on how to maximize annual profits In addition, helping the bank to develop in a fiercely competitive market, not only by strong domestic competitors but also by foreign banks joining today because of globalization taking place more quickly

Since financial tasks will add to making manageable benefits and expanding bank strength In reality, administrators can perceive that even though the banking business in Vietnam is expanding, it is still small in comparison to other banks in the region Banks are dealing with a slew of issues, including asset quality, significant bad debt, liquidity issues, and low profitability In the past, in Vietnam, the problem of determining the factors affecting the profitability of commercial banks has received much attention Specifically, in the following research studies on commercial bank profitability of foreign authors in countries around the world: Dietrich and Wanzenried (2011); Saif-Alyousfi (2022), … In Vietnam, there are studies such as: Dietrich and Wanzenried (2011); Saif-Alyousfi (2022) In Vietnam, there are studies such as: Đạt (2019); Hiền and Hà (2021); and Hùng (2016)

Creating liquidity is not a strange concept in the banking sector It can also

be seen as the liquidity conversion activity of banks in their business activities Liquidity is created when banks hold illiquid items for non-bankers Those items are then provided to them with highly liquid liabilities, whereby liquidity creation is created In general terms, the main factors that banks pay attention to are capital or the ability to create liquidity for the bank This is explained because of its effect on the financial performance of the bank Previous research in the world has all addressed liquidity, liquidity risk, and how to manage it

Aside from the various elements that impact profitability, the writers frequently emphasize bank liquidity risk issues and liquidity factors in the Vietnamese market According to the current theory of financial intermediation, Berger and Bouwman (2009) liquidity creation and risk transfer are two fundamental tasks and activities that banks perform in the economy In some ways, banks' ability to perform those two roles is essential for their success Liquidity, liquidity risk, and how to manage it have all been addressed in previous research There is rare research on liquidity creation, particularly its influence on commercial bank profitability in Vietnam Studying the impact of capital, and liquidity creation

on bank profitability in Vietnam Thành, Như, and Hương (2016), the impact of

liquidity creation Phạm Thị Thanh Xuân, Nguyền Thị Mỹ Linh (2021) and the liquidity channel Dan and Japan (2022); and Dang (2020) as a result of monetary policy adjustments

Over the years, a range of studies on liquidity creation and its influence on banks have been carried out in nations all over the world Liquidity creation by Berger and Bouwman (2009) has earlier been studied; although there is a negative association between liquidity creation and bank capital in the risk-reward trade-off, liquidity creation is growing in various banks The impact of liquidity creation on commercial bank profitability has received far less attention, and there is little research in the field in Vietnam Moreover, there are few studies regarding the study

on commercial banks' liquidity creation affect bank profit in Vietnam Finding appropriate ways to prevent the negative factors impact of profit improvement and enhancement for commercial banks in Vietnam is thus essential at all times Furthermore, as the Vietnamese economy continues to integrate deeper and deeper into the global economy, commercial banks in Vietnam have greater opportunities

to perform a variety of activities and earn more profits But at the same time, there are also many potential risks and challenges, which require commercial banks in Vietnam to constantly innovate and improve their financial and profit capacity To not only assist them in remaining steady but also to reassert their position in the area and worldwide in support of the country's stable and sustainable growth banking system The article examines the relationship between the effects of liquidity creation in the same direction or in the opposite direction, from which appropriate recommendations are made Various factors impact bank profitability, including internal elements of financial institutions, and economic issues Additionally, while examining the variables affecting bank profitability in Vietnam, the author found that the liquidity component is seldom researched and acknowledged, but commonly refers to liquidity risk Accordingly, the author chose

to write about "The impact of liquidity creation on bank profitability: Empirical

evidence from Vietnamese commercial banks" in this article To find out whether

to increase or not increase liquidity creation, the author conducts research with the main variable being liquidity creation

1.2.1 General objectives

The main objective of the study is to analyse the impact of creating a bank’s liquidity, at the same time, bank-specific factors and macro factors affecting the profitability of 23 commercial banks in Vietnam in the period 2009-2020 From the research results, make suggestions to help commercial banks increase profits

 What factors affect the profitability of commercial banks in Vietnam?

 What solutions to increase profits for Vietnamese commercial banks in the future?

1.4.1 Research subject

The study's focus is on the factors that influence commercial bank’s profitability, particularly liquidity creation

1.4.2 Research scope

 Scope of content: This thesis mainly focuses on researching issues related

to the banking sector, namely liquidity creation Focusing on analysing liquidity generation and its impact on commercial bank profitability

 Spatial scope: The study was performed in Vietnam with twenty-three

commercial banks Because these twenty-three commercial banks provide transparent and complete disclosure of the data the author requires for the research, the author has chosen them

 Scope of time: The study was carried out in the period from 2009-2020

The author uses both theoretical framework and quantitative methodologies

to complete the thesis:

The theoretical framework: The study utilizes synthetic methodologies and

theoretical foundations to organize concepts and topics linked to bank liquidity and profitability At the same time, the thesis is based on local and international research

on the issue to identify the financial elements that influence the profit of Vietnamese commercial banks Combining theory and experiment with research and reference to previous research papers, combined with the author's method to conduct research, thereby analyzing regression results

Quantitative study methodology: Based on the secondary data from

twenty-three commercial banks' annual consolidated financial statements from 2009 to

2020

The data of the thesis is panel data: Research using the multivariable

regression model The author starts by running Pooled ordinary least squares (Pooled OLS), next moves on to the FEM and REM model The author selects the suitable model for the research using the Hausman test after using the F-test to choose the POLS and FEM models Finally, to find out the effect of the factors affecting the dependent variable, test the study's hypotheses The study uses the feasible generalized least squares (FGLS) to assess issues including the

Heteroscedasticity phenomenon and autocorrelation phenomenon Finally, compare the results of the models as well as the tests to make a decision whether to accept or reject the proposed hypotheses

1.6.1 Literature gap

The research gap of the previous studies presented has 3 main points First,

to the best of my knowledge, there have been no studies that directly measure the

"cat fat" liquidity creation on the profitability of commercial banks in Vietnam Regarding this research direction, most of the previous studies in Vietnam analyse the impact mainly on liquidity creation analysis according to the "LTG" measure or only calculate the liquidity creation without incorporating the measurement based

on "cat fat" and bank profits Second, compared with previous studies in Vietnam, there is no specific empirical evidence on three separate liquidity factors: asset-side liquidity (LCA), liabilities-side (LCL), and creating off-balance sheet (LCOBS) At the same time, consider the influence of these three factors on the profitability of Vietnamese commercial banks in the period 2009-2020 Third, currently, in Vietnam, there are not many policy implications and recommendations on creating liquidity in order to promote the development of banking activities, contribute to stability and increase efficiency for Vietnamese commercial banks

To fill these gaps, the thesis will develop a measure of "cat fat" as well as its three individual components for the liquidity generating variable in Vietnam, based

on research by Berger and Bouwman (2009) At the same time, based on previous research Duan and Niu (2020), we will build a liquidity generating variable (LC) to divide total assets and perform regression through four research models

Compared with previous empirical studies, the thesis's topic has some new contributions The study incorporates a measure of liquidity creation based on the

"cat fat" method and also find mixed results on how liquidity creation affects bank performance Through variables LCA, LCL, LCOBS to directly assess the extent to which the separate factors of liquidity creation affect bank profitability Finally,

from research results, the graduate thesis suggested some policy implications and recommendations about liquidity creation to help increase profits of commercial banks in Vietnam

1.6.2 New contributions

The graduate thesis contributes to the theoretical and practical significance

of the research topic:

Scientific significance: Based on previous studies, the author has reviewed

the theoretical foundations of liquidity creation and how to measure it thanks to the research of domestic and foreign researchers Thereby, the study has focused to examine the impact of the liquidity measure on the profitability of commercial banks and build a test model to evaluate the influence of liquidity and factors related to the profitability of Vietnamese commercial banks

Practical significance: Our research contributes to the literature on liquidity

creation by commercial banks in Vietnam focused on the results of the study on the influence of liquidity creation on bank profitability in Vietnam It will also be eligible for reimbursement administrators to assess the impact of liquidity creation

on bank profitability to some extent The study also helps to the creation of liquidity

in the Vietnamese economy through commercial banks and their particular pillars

The author breaks the study topic into five chapters, according to the structure:

Chapter 1: Introduction

The author will raise concerns to be explored as well as the importance of the topic in the present framework in this chapter This part will include information such as the scientific basis for the research issue, explanations of the research topic's aims, and research questions to achieve the objectives

Chapter 2: Theoretical basis and literature review

The theoretical background of liquidity creation, as well as previous locally and internationally conducted studies on the influence of liquidity creation on a

bank’s performance, will be presented in Chapter 2 As a basis, the theoretical groundwork for this study's hypothesis is presented Furthermore, summarizing and evaluating previous relevant studies to give quantitative factors affecting profitability to set up an empirical model linking liquidity creation, banking-specific factors, and macro variables on commercial bank profitability in Vietnam

Chapter 3: Research methodology

Based on the theoretical basis stated, Chapter 3 will present the research model, research hypothesis, methods of variable identification, data processing methods, and quantitative methods to estimate the level of impact Specifically, specific research steps such as how to determine the sample, collect data, select factors, and apply the specific model according to the conditions of Vietnam are covered From there, the author runs the data regression according to the model and test, and the way to choose the appropriate model will be presented specifically and clearly The author will present the steps to build liquidity measurement variables and estimation methods to achieve the research objectives and research questions

Chapter 4: Research results and discussion

The results of the estimated model will be presented in Chapter 4, as well as descriptive statistics for the variables in the regression model Examine the association between the variables in the model, and explain the results The author utilizes the quantitative analysis tool Stata15 to estimate the regression coefficients

in the model based on the previous empirical research The author will compare the outcomes of the estimations with prior research in order to understand the influence

of liquidity creation on the financial performance of commercial banks in Vietnam

Chapter 5: Conclusion and recommendations

The content of Chapter 5 gives a summary of the topic's research findings based on the research questions and research objectives that were specified at the beginning The author then makes proposes policies to assist banks to boost profitability by increasing the amount of liquidity they create Furthermore, the author's ideas are a reference source for planners and leaders on how to restrict

liquidity creation in order to optimize commercial bank profits

CONCLUSION CHAPTER 1

In this chapter, the author has introduced an overview of the research of the graduate thesis so that readers can initially visualize the research The thesis in

Chapter 1 shows why the author decided to explore the issue of the "Impact of

liquidity creation on the profit of Vietnamese commercial banks" A brief overview

of the research process on liquidity creation of banks is presented through which research gaps are introduced based on the lack of research on liquidity creation and bank profitability The subject, objects, scope, and approaches are identified to serve as a framework for the rest of the chapters, as well as the process of accurately seeking and collecting data The author will stick to the specified orientation in the subsequent chapters of the thesis, achieving the original goal and answering the questions asked step by step

CHAPTER 2: THEORETICAL BASIS AND LITERATURE

REVIEW

In chapter 2, the author will present banking theories, theoretical foundations, and empirical studies related to the topic of the impact of liquidity creation on the profitability of commercial banks Therefore, this chapter will discuss how to identify research gaps and design orientation for the research model for the topic

According to Berger and Bouwman (2015), commercial banks in the US act

as the organizations that receive loans and deposits from customers Commercial banks can only conduct and trade off-balance sheet operations that are regulated and supervised by a certain authority In addition, this is an organization with a large number of assets as well as liabilities such as guarantees and off-balance sheet commitments A commercial bank, according to Rose (2002), is a type of financial organization that offers the biggest range of financial services, particularly credit, savings, and payment services

Commercial banks also produce capital for business, investment, and lending operations through issuing bonds, and stocks, borrowing from other credit institutions; and borrowing from the central bank Commercial banks employ that capital to create money for themselves, while also calculating how to deploy capital efficiently, offset borrowing costs, and make money Idle money spread across society will be mobilized thanks to this system of intermediate financial institutions

to satisfy the capital demands of other companies and individuals for the goal of economic growth in secure and sustainable ways

2.2.1 The concept of bank profitability

A commercial bank's operational efficiency is often assessed in terms of profitability According to the commercial bank business theory by Berger and

Bouwman (2009), operational efficiency may be defined in two ways: one is the ability to turn raw resources into completed goods or profitability, and the other is the ability to reduce expenses to increase profitability The bank's competitiveness with other financial institutions comes in second, followed by the likelihood of a safe operation According to Menicucci and Paolucci (2016), the theory of bank profitability is that profitability is one of the important indicators that investors should pay attention to This is the profit level that commercial banks sustain from year to year, indicating the bank's level of business and managerial efficiency The bank's yearly retained earnings will provide for additional flexibility in financing investment operations Therefore, banks will be able to make greater investments to increase profits and market competitiveness

Profits are constantly of interest to company owners and investors, and they play a vital part in the bank's reputation and long-term existence If a bank has good business performance, its reputation will be enhanced, people will feel more secure

in their decision to deposit money at banks and borrow money from banks Therefore, by helping the bank's working capital increase, the bank will have the opportunity and ability to expand the scale of business activities, contributing to increased profits Commercial banks are also a type of enterprise, so the profit of commercial banks can be considered as the performance of an enterprise doing business in the monetary field Within the scope of this study, the author considers the profitability of commercial banks to be maximizing profits while minimizing costs as capital

2.2.2 Profit measurement criteria of commercial banks

 Absolute profit value: The volume of the value is represented by absolute

profit figures, which might include the following criteria: Revenue before income tax and profit after income tax are two different things from net profit When comparing banks of various sizes, it is clear that absolute figures have the drawback

of not reflecting the bank's real business efficiency The absolute values of profit are frequently used in banking operations to summarize the bank's business activities as

a measurement to set out the bank's business plan for the following year Because of this disadvantage, academics rarely use absolute profit values in scientific studies,

preferring to use relative profit evaluation criteria instead

 Relative profit value: The ratio of return on equity (ROE) and return on

total assets (ROA), are indicators commonly used by the authors when researching

profits:

 ROA – Return on Asset

Banks evaluate the efficiency of asset use through ROA The higher the ratio, the higher the bank's profitability This is not only an important and very popular indicator to measure the profitability of banks, but is also used to measure the profitability of businesses in general in the current market ROA is a measure of the effectiveness of a bank's management Rose and Hudgins (2008), showing its ability to convert assets into net income

ROA=

(2.1)

In addition, the study by Dietrich and Wanzenried (2011), shows how much profit a dollar of assets will generate When this indicator is larger, the quality of asset management the more effective the product This indicator measures the efficiency of commercial banks' investment Consider how likely they are to earn a return on their investment in the property as a percentage ROA helps managers, as well as investors, see the bank's comprehensive ability to generate net income from assets

 ROE - Return on Equity

In profitability studies such as those of the authors, ROE is often used to assess profitability per dollar of equity: (Le and Ngo, 2020; Mergaerts and Vander

Vennet, 2016),… Return on equity is an important ratio for shareholders, which

measures the profitability of each dollar of common stockholders' equity:

ROE=

(2.2) According to the author Ahsan (2013), ROE can be understood conceptually

as the profit after tax paid to shareholders as a percentage At the same time, this is

a ratio that many investors always pay attention to and watch carefully Because it is used as a measure to reflect how much value a business creates for its owners - shareholders

2.3.1 Definition of liquidity creation of commercial banks

Modern financial intermediation theory Berger and Bouwman (2015) recognizes that banks provide liquidity, which adds to its playing an important role

in the economy For banks, creating liquidity is a necessary and important task to provide for the economy By using relatively liquid liabilities such as deposits, Jiang, Levine, and Lin (2016), the customer then uses them to finance illiquid assets such as loans, thereby creating liquidity When turning illiquid assets into liabilities, the bank's liquidity creation function was demonstrated in economic terms in the study by (Beck, Demirgüç-Kunt, Laeven, and Maksimovic, 2006; Diamond and Dybvig, 1983) Customer deposits, Sahyouni and Wang (2019), are one source of liquidity, as they will be used to fund the bank's long-term lending activities To put

it in other words, it's the mismatch in a bank's liquidity creation between long-term (illiquid) assets and short-term (liquid) debts When issuing long-term loans, increasing the quantity of cash on hand reduces the bank's capacity to create liquidity

According to W A Boot, I Greenbaum, and V Thakor (1993), it has been recognized that commercial banks have long held illiquid assets that are customer deposits The liquidity of deposits is created when there is a combination of asset conversion services such as insurance depositors and the central bank acting as the lender of last resort In addition, the article also refers to activities such as loan guarantees and off-balance sheet commitments It is also considered to create liquidity for banks, thereby helping businesses develop and make long-term investments more effectively

2.3.2 Liquidity creation theories

 Creation of liquidity on the balance sheet

Previous studies focused on different aspects of the liquidity creating categories of the balance sheet, such as the asset side, the liability side, or both the asset side and the capital side Given the focus on liabilities on bank balance sheets (Bryant, 1980; Diamond and Dybvig, 1983), liquidity creation is viewed as a safety net for consumers who are unsure about the timeliness of their deposits and take money out of the bank The client's timely withdrawal request creates liquidity in this case The importance of both assets and liabilities is also highlighted in the study In the paper Donaldson, Piacentino, and Thakor (2015), they look at when banks focus and are active on assets when they lend so that the economy is invested more from that cash flow

According to the liquidity creation theory Berger and Bouwman (2009), banks create liquidity for their clients by converting liquid assets into illiquid liabilities or financing illiquid assets with liquid liabilities This approach to the topic of liquidity creation is similar to Berger and Bouwman (2015), and in the thesis, the author also explains liquidity creation based on the understanding and reasoning Banks convert illiquid loans, such as business loans, into deposits, which are often referred to as highly liquid liabilities The creation of liquidity on their balance sheet for the general public continues from there

 Creating liquidity off the balance sheet

As per the previously discussed theory, banks have recognized that an balance sheet item is comparable to loan commitments, loan guarantees, guarantees, and similar needs with liquidity funds to create liquidity (Holmström and Tirole, 1998; Kashyap, Rajan, and Stein, 2002) Consequently, the consumer can withdraw money from the bank under the same terms as before Bank lending commitments Berger and Bouwman (2016), are similar to illiquid bank loans from the bank's point of view Banks are similar in that they both must supply the capital to consumers when they need it Customers regard loan commitments as transactional deposits because of their liquidity; customers may withdraw at any moment, but the

off-duration of the commitment - from the customer's perspective - determines how lengthy the commitment is Therefore, to create liquidity, a bank that holds a loan commitment must hold something illiquid and at the same time provide the customer with something liquid Much of the liquidity required to create off-balance sheet liquidity requires banks to hold loan commitments and similar requirements for liquidity funds On-balance sheet and off-balance sheet liquidity creation have synergy (Gatev and Strahan, 2009; Kashyap et al., 2002)

2.3.3 Create liquidity and metrics

2.3.3.1 The role of creating liquidity with commercial banks

Banks operate and simultaneously perform many important functions of a

country, of which two main functions stand out That is, Al-Khouri and Arouri (2019) act as financial institutions and also contribute to the transfer of risk in the economy Moreover, banks are recognized as entities that play an intimate role in the role of liquidity generators and providers When banks create liquidity, they transfer resources beneficially and efficiently Because of the receiving of highly liquid short-term debt as a result of deposits and the development of illiquid long-term credit, movements occur primarily in the transition from savings to investments As a consequence, Levine (1991) the bank facilitates effective production and consumption operations

Liquidity creation, on the other hand, has an impact on banks since it needs them to have accessible cash and access to their financial resources Banks will provide rapid liquidity if certain conditions are met, such as if obligations are converted smoothly and promptly, or if they are not Banks will create quick liquidity when it meets items such as: If commitments are converted to cash efficiently, quickly or they will not suffer losses In addition, the fragility of the capital structure of banks can occur when there is a discrepancy between a bank's assets and liabilities Short-term sources of strong liquidity combine to become a source of capital to maintain business operations, making it more sustainable to support the economy through credit and payment channels, thanks to liquidity

creation from working highly liquid capital sources to finance illiquid assets scale and short-term capital will continue to be a source of unused and illiquid capital scattered across the economy if banks do not engage in these liquidity-

Small-creating activities In addition, Jiang et al (2016) banks can improve capital

allocation and accelerate economic growth by creating liquidity

2.3.3.2 Indicator for measurement of liquidity creation

 Liquidity transformation gap (LTG) measure:

So far, in the studies on liquidity creation, depending on the point of view and the characteristics of the research paper, the measurement method of liquidity creation of commercial banks will be used Accordingly, it was first developed on a bank's ability to create liquidity as a measure built by Deep and Schaefer (2004) In this study, the ability to generate drill rods is calculated through the "liquidity transformation gap" - (LTG) formula:

LTG = (Liquid liabilities – Liquid assets)/Total assets (2.3) The study's findings revealed that LTG accounted for around 20% of the total assets of a group of large banks in the United States, leading to the conclusion that these banks did not provide much liquidity for the economy This measure mainly measures long-term, examines loans less than one-year liquid and conversely over one year illiquid, and classifies assets and liabilities based on maturity

 “Cat fat” measure of liquidity creation:

The LTG is an intuitive measure, but according to Berger and Bouwman (2009) research, it is not comprehensive enough to more accurately reflect a bank's liquidity creation ability Therefore, Berger and Bouwman (2009) developed new liquidity creation measures on the basis of inheriting the "LTG" research platforms

of Deep and Schaefer (2005) There are four methods of measuring liquididy creation, including: “cat fat”, “mat fat”, “cat nonfat” and “mat nonfat” In particular, two categories, "cat fat" and "cat mat" focus on classifying items on and off the balance sheet by category, by nature of the bank's operations (Category - Cat) or by maturity (Maturity - Mat) The other two categories are “cat nonfat” and “mat

nonfat” which exclude the bank's off-balance sheet items when calculating the bank's ability to create liquidity These four-liquidity calculation methods have been further refined when considering the effect of all banking activities on liquidity creation

The four methods of calculating liquidity Berger and Bouwman (2009) are

recognized and widely used in many subsequent studies by research studying liquidity around the world "Cat fat" is considered the most advantageous method because it classifies loans by the category "cat", instead of by the term (mat) In the study, the “cat fat” measure was the measure that was mentally closest to the financial intermediation theories In this final thesis, the author will use "cat fat" as

a measure of the liquidity creation factor of commercial banks in Vietnam This "cat fat" method is also built by way of a three-step process step

2.3.3.3 Steps to calculate liquidity creation variable

Step 1: Classify activities such as assets, liabilities, equity, and off-balance sheet activities for each class into liquid, semiliquid, or illiquid categories

The classification of all banking activities is based on information on the bank's products and services

Step 2: Give weights to the activities that were classified in Step 1

The basis for the allocation of weights is the liquidity theory argument According to theory, on balance sheets, banks' liquidity creation occurs when they convert illiquid assets into highly liquid liabilities When liquid liabilities are used

to finance illiquid assets such as business loans or illiquid OBS, liquidity is created Therefore, a positive weight is applied to both illiquid assets and illiquid OBS, as well as liquid liabilities Similarly, negative weights are assigned to liquid assets, liquid OBS, and illiquidity liabilities such as liabilities and equity A dollar of liquidity, is destroyed when a dollar of illiquid liabilities or equity is transferred to a dollar of liquid assets or liquid OBS activities The magnitude of the weights is based on simple constraints Berger and Bouwman (2015) For example, $1 of liquidity will be created when a bank converts $1 of illiquid assets into $1 of liquid

debt When banks convert a dollar of liquid assets into an illiquid debt, an illiquid

dollar is destroyed The weight of 1/2 is applied to illiquid assets and liquid

liabilities based on this situation, whereas a weight of -1/2 is allocated to liquid

assets and illiquid liabilities The weighting of the average liquidity items between

liquid and illiquid activities is zero that is assigned to the semiliquid assets,

semiliquid liabilities and semiliquid guarantees

Illiquid assets

(weigh= 1/2)

Semiliquid assets (weight =0)

Liquid assets (weight = –1/2)

Fixed assets Loans to customers Cash and cash equivalents

Liquid liabilities

(weight = 1/2)

Semiliquid liabilities (weight =0)

Illiquid liabilities and equity (weight

Other borrowed money

Amounts due to the Government and the State

Illiquid guarantees

(weight =1/2)

Semiliquid guarantees (weight = 0)

Liquid guarantees (weight =-1/2)

Source:(Dan and Japan, 2022; Xuân et al., 2021)

After the classification of all on-balance sheet and off-balance sheet activities

Table 2.1 Classification of assets and equity on and off the balance sheet of

Vietnamese commercial banks by liquidity

in step 1 has been completed, their weights are assigned to include weights for liquid, semi-liquid and illiquid asset classes, liabilities plus equity, off-balance sheet guarantees and derivatives Classification of assets and equity on and off the

balance sheet of Vietnamese commercial banks with liquidity (Step 1 combined

with step 2)

Based on that classification, the author makes adjustments to the payables with the customer's deposited items classified as coefficient ½ Dan and Japan (2022) when studying the case of the banking industry in Vietnam It is also based

on Xuân et al., (2021) research to adjust it to suit the research situation in Vietnam

Step 3: We use the equation to calculate a "Cat fat'" measure of liquidity

creation by combining the results of step 2

= 1/2 × (Illiquid assets + Liquid liabilities + Illiquid off-balance sheet guarantees)

+ 0 × (Semiliquid assets + Semiliquid liabilities + Semiliquid off-balance sheet guarantees)

– 1/2 × (Liquid assets + Illiquid liabilities and equity + Liquid off-balance sheet guarantees)

Source: (Berger & Bouwman, 2009a)

Then the liquidity creation variable (LC) will be calculated by dividing the

total assets by the calculated in the formula This is also explained by traditional bank liquidity, which focuses on base ratios such as the use of only a proportion of the bank's assets and/or liabilities A bank's liquidity capacity, on the other hand, measures how much liquidity it provides for its customers and the economy, making it less liquid in the process To make the dependent variables meaningful comparisons across banks, and to avoid giving too much weight to the largest

Liquidity creation

“cat fat”

(2.4) Table 2.2 Cat fat measure of LC

banks:

LC = Liquidity creation “Cat fat” / Total assets (2.5)

Note: Normalized liquidity creation (liquidity creation divided by assets) provides a

more direct and extensive measure of a bank's illiquidity, as well as an inverse measure of a bank's liquidity

The asset – side liquidity creation (LCA)

 On the asset-side (LCA) = ((0.5 × (Illiquid assets) + 0 × (Semiliquid assets) -

The liabilities-side liquidity creation section (LCL)

 On the side of liabilities (LCL) = ((0.5 × Liquid liabilities+ 0 × (Semiliquid liabilities) − 0.5 × (Illiquid liabilities and equity)) / Total assets (2.7)

The off-balance-sheet-side liquidity creation section (LCOBS)

 On the off-balance sheet (LCOBS) = ((0.5 × Illiquid off − balance sheet items + 0 × (Semiliquid off − balance sheet items) − 0.5 × (Liquid off −

CREATION ON BANK PROFITABILITY

2.4.1 Domestic studies

In Vietnam, there are still not many direct studies on the issue of the impact

of liquidity creation on the profitability of commercial banks The author will refer

to several studies on the impact of liquidity creation on commercial banks' profits, and other articles related to liquidity creation:

A study was conducted by Yen and Chau (2021) on the influence of the Liquidity transition gap on the minimum capital adequacy ratio of sixteen Vietnamese commercial banks The model is tested using the FGLS approach, with the LTG as the representative dependent variable and the minimum capital ratio as the independent variable According to the study's findings, the liquidity conversion variable has a negative influence on the minimum capital adequacy ratio variable In

addition, the experimental results show that the range for the liquidity conversion gap of commercial banks in Vietnam in the research period is from 0.1 to 0.25

The study is carried out throughout the period 2007 - 2020, Xuân et al., (2021)

focusing on analysing the liquidity creation function for Vietnam's commercial banking system The study publishes methods to measure liquidity and applies them

to calculate for each commercial bank in Vietnam The results from the study show that, in the current Vietnamese commercial banking system, there is a clear differentiation between the state-owned joint-stock commercial banks and the rest

in terms of operational scale In addition, the author's analysis results not only help

to classify banks according to their ability to create liquidity but also serve as an initial basis for recommending the development of a secondary market for credit activities

Research Thành, Như, and Hương (2016) learn about the relationship between capital and liquidity creation by commercial banks in Vietnam It is conducted based on an analysis that explores the structural impact of bank capital and liquidity creation on the performance of banks in Vietnam In addition, the article also examines the influence of liquidity creation on the profitability of commercial banks The study was conducted with commercial banks in Vietnam period 2009 - 2014, using the Granger causality model and linear structural model The results show that there exists a negative causal relationship between bank capital and liquidity creation At the same time, the article also finds that when banks reduce equity at present, it will increase liquidity creation at a later time Trung and Sang (2014) learn about the factors that influenced the performance of Vietnamese commercial banks from 2005 to 2012, analysis of data from thirty nine commercial banks Total operating expenditures to total revenue, the ratio of bad debt to total outstanding loans, the category of the bank, and the ratio of equity to total assets have a negative influence on the performance of Vietnamese commercial banks Meanwhile, the loan-to-total assets, market share ratio via the

ROE variable, and equity-to-total assets ratio via the ROA variable all have a positive effect on Vietnamese commercial bank performance

Research on the bank liquidity channel of monetary policy, Dan and Japan (2022) in the period 2007–2019, uses the "cat fat" and "cat nonfat" measures to study liquidity creation in Vietnam The results of the study show that the bank can expand the liquidity generated more strongly after the central bank loosens monetary policy through interest rate cuts or loosens monetary policy through the supply of more money to the market In addition, it provides empirical evidence in Vietnam that the more a bank is financed by deposits, the more strongly its liquidity creation is affected by changes in monetary policy

2.4.2 Foreign studies

Research on bank liquidity creation Berger and Bouwman (2009), this is the research that lays the groundwork for the measurement of liquidity factors including off-balance sheet items, and makes the measurement more accurate The article shows that banks that generate more liquidity also have a higher ratio of market return to market price In addition, the article also demonstrates that banks that create more liquidity are favoured by investors, resulting in increased profitability

According to Duan and Niu (2020) research, there are a total of 412082 quarterly data observations in the United States from 2001 to 2016 According to the FEM estimation technique, the collected data to study the relationship between liquidity creation and bank profitability The research examines it from a variety of perspectives, including the period before the crisis - through and after the global economic crisis of 2009 and the size of the bank In addition, the examination also includes the various pillars of liquidity creation The findings of the research suggest that: for the cases investigated by the author, banks of various sizes in normal times as well as during crises showed that the larger the liquidity creation, the higher the bank's profitability Individual factors such as liquidity creation, liabilities, and off-balance sheet company operations all have a positive influence

on profit, whilst the asset side has a negative impact

Sahyouni and Wang (2018) have focused on how liquidity affects bank

profitability in developing and emerging markets all over the world The authors explore the amount of liquidity these banks create, how they create liquidity and other macro factors that impact bank profitability The study's empirical evidence shows that the amount of liquidity produced by banks has risen in recent years In the study, with a sample of six developed and five emerging countries, the results show that creating liquidity has a negative effect on bank profitability, which is consistent with the author's hypothesis initial guess That is the expected bankruptcy cost hypothesis If the bank increases liquidity creation, it will increase the level of liquidity risk for the bank, which in turn will increase the bank's probability of bankruptcy Reducing the profitability of the bank Banks that create more liquidity have lower established returns Markets are affected differently by macro issues Furthermore, operational efficiency and credit quality have a detrimental effect on bank profitability

Sahyouni and Wang (2019) performed a study in the Middle East and North

African countries from 2011 to 2016 to examine the liquidity creation of Islamic and conventional banks, as well as the relationship between liquidity creation and bank performance This paper investigated a sample of Islamic and conventional banks in the Orbis Bank Focus dataset, which includes panel data from across eighteen Middle Eastern and North African nations The study's empirical findings suggest that conventional banks create more liquidity than Islamic banks At the same time, regression analysis reveals a correlation between bank profitability and liquidity creation They have a positive association and utilize a return on average equity to evaluate bank profitability In contrast, the researcher found no correlation between the profitability of Middle Eastern and North African banks and the

profitability scale using the return on average assets

The findings of this study Abbas, Iqbal, and Aziz (2019) consider the effects

of bank capital, bank liquidity, and credit risk on commercial bank profitability Compared the banking industry in rich Asian nations to the banking business in the

United States during the post-crisis period from 2011 to 2017 According to the findings, liquidity has a negative impact on profitability for big US commercial banks but has a positive impact on profitability for commercial banks with economic expansion in Asia in the post-crisis period According to the study, liquidity has a greater impact on profitability than capital, regardless of the size of the bank Furthermore, the author also shows that credit risk has a negative effect on bank profitability while liquidity and bank capital have a positive impact

Commercial banks in eighty four countries throughout the world Yusgiantoro, Soedarmono, and Tarazi (2019), comprising five hundred and fifty eight commercial banks It is also regarded as the first cross-national study of the interplay between regulatory capital, liquidity, bank profitability, and financial stability Not only does the author look at how much liquidity these banks have generated over time, but he also looks at how capital, liquidity, and bank profitability interact Using the Cat fat measure as the independent variable, which represents the bank's liquidity creation, and the bank's factors as the dependent variable, which includes ROA and ROE, as well as several other macro variables The authors' research results, show that creating liquidity leads to lower bank profitability and higher financial instability At the same time, banks in higher-growth countries exhibit higher liquidity generation capacity

For the period 1996 to 2013, this study by Thao, Lin, and Hoa (2016) explores the interrelationships between US liquidity creation, regulatory capital, and bank profitability, it does so for each year separately The findings of the study reveal that during non-crisis periods, a bank's capital regulation and liquidity creation have a positive impact on each other, which is especially true for small banks They discovered that banks create greater liquidity while having a higher risk

of illiquidity had poorer profitability Their findings have a wide range of policy and regulatory consequences for policymakers and regulators Overall, the authors discover a negative association between liquidity generation and bank performance, which is consistent with their theory's estimated bankruptcy cost hypothesis