Income diversification, credit risk and bank stability: evidence from an emerging market

Abstract

ABSTRACTWith a sample of 28 commercial banks in Vietnam – an emerging market – this study applies the generalized movement model estimation technique (GMM-SYS) to examine the influences of income diversification and credit risk on bank stability (measured by Z-score) spanning from 2010 to 2020. The empirical findings document the significant impacts of income diversification and credit risk, together with specified macroeconomic and bank-specific indicators, on bank stability. A threshold analysis, in addition, quantifies the recommendation changes in NPL and LLP to contribute to bank stability. Some policy implications are subsequently withdrawn to promote the stability of Vietnamese commercial banks.KEYWORDS: Bank stabilityincome diversificationcredit riskemerging market Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1. Industry 4.0 is the digital transformation of manufacturing/production, related industries, and value creation processes. Cyber-physical systems form the basis of Industry 4.0 (e.g. ‘smart machines’). They use modern control systems, embedded software systems, and dispense with an internet address to connect and address the IoT (the Internet of Things).2. Basel III (the Third Basel Accord) is a global regulatory framework on bank capital adequacy, stress testing, and liquidity risk. It deals with the deficiencies in financial regulation revealed by the financial crisis of 2007–08.3. World Bank Report, Global Development Horizons 2011 – Multipolarity: The New Global Economy.4. The Association of Southeast Asian Nations.5. GCC member countries include Bahrain, Kuwait, Oman, Qatar, United Arab Emirates, and Saudi Arabia.6. MENA is an English-language acronym referring to the Middle East and North Africa. It is alternatively called the WANA, referring to the West Asia and North Africa region.7. https://data.worldbank.org/indicator8. https://www.gso.gov.vn/en/statistical-data/9. The theory and notation for GMM presented herein follow the study of Hayashi (Citation2000). Further discussions of GMM are provided in Ferson (Citation1995), Hall (Citation2005), Greene (Citation2004) and Ogaki (Citation1992).10. Threshold regression method was developed for non-dynamic panels with individual-specific fixed effects. The method was applied to a 15-year sample of 565 US firms to test whether financial constraints affect investment decisions (Hansen Citation1999).11. This index was developed independently by the A.O. Hirschman (Citation1945) and O.C. Herfindahl (Citation1950).12. Although the pandemic has heavily disrupted the economy, Vietnam’s GDP growth rate remained one of the highest in the Asia-Pacific Region, at 2.91% in 2020. In January 2021, it was projected to increase to 3.8% in 2021.13. VAMC (Vietnam Asset Management Company) is a state-owned company and supervised by the State Bank. Its principal activities are purchasing from credit institutions, debt collection, debt sale, and handling collateral.Additional informationFundingThis work was supported by the Vietnam (NAFOSTED) under Grant number. National Foundation for Science and Technology Development 502.02-2018.16