Impacts of Digital Transformation and Basel III Implementation on the Credit Risk Level of Vietnamese Commercial Banks

Abstract

For a bank-based economy like Vietnam, the commercial banking sector’s conduct greatly influences Vietnamese economic and social prosperity. In Vietnam, net income from credit activities hold the largest portion of the total revenue of Vietnamese commercial banks. Therefore, in the context of Vietnam, credit risk obviously also plays a pivotal important role in the banking sector. Hence, the risk of credit failure can lead to a bank’s collapse and have a profound effect on a country’s societal structure. As seen in the previous literature, there are many macroeconomic and bank-level factors that have commonly affected the level of credit risk; however, these factors may change in the recent development era of the banking industry, especially the new impacts of digital transformation and the transition to full Basel III adoption. The overall aim of this study is to analyze the impacts of digital transformation and Basel III implementation on the credit risk level of Vietnamese commercial banks during the period from 2017 to 2023, with a sample of 21 Vietnamese listed commercial banks. This study employs the pooled OLS, fixed effect model (FEM), and random effect model (REM) methods to reach the finding that investing in technology for the readiness of digital transformation and implementing Basel III could adversely affect credit risk. Based on this finding, the authors give some recommendations for commercial banks to enhance the sustainability, safety, and better management of credit risk.