MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OFVIETNAM
BANKING UNIVERSITY OF HO CHI MINH CITY
MAI BINH DUONG
IMPACT OF EQUITY, CREDIT RISK ON FINANCIAL
STABILITY OF VIETNAMESE COMMERCIAL BANKS
SUMMARY OF DOCTORAL THESIS
Major: Finance - Banking
Code: 62.34.02.01
Academic advisor: Assoc. Prof. Dr. Nguyen Ngoc Thach
HO CHI MINH CITY - 2017
CHAPTER 1: INTRODUCTION
1.1. The urgency of the subject
The commercial banks bring into play a very important role for each economy,
contributing to attracting capital and providing loans. Business activities of
commercial banks must always ensure stability, safety and profitability. Along with
capital markets through the stock market, the money market through the banking
system is the place to provide capital to the economy. With active mobilization of
temporary idle funds in all organizations, individuals, all economic sectors
(temporarily idle capital released from the production process, from the source of
savings of the population ... ) through commercial credit, commercial banks have
provided capital for the economy, fully meet the timely reproduction process.
Thanks to the operation of the commercial banking system, especially the credit
business, enterprises have the conditions to improve their business activities,
contributing to improving the efficiency of the whole economy. Therefore, we can
assert that the main subject to meet capital needs for business activities is
commercial banks. In addition, commercial banks are tools to regulate the macro
economy. In the operation of the market economy, the operation of commercial
banks if effective will really become an effective tool for the State to regulate the
macro economy. Through credit and payment activities between commercial banks
in the system, commercial banks have contributed to expanding or reducing the
amount of money in circulation. Moreover, by granting credits to the economy,
commercial banks carry out the flow of money, gather and divide the capital of the
market effectively. Thus, stabilization of the commercial banking system plays an
important role in the financial system of Vietnam.
Since the financial crisis of 2008-2009, many experts have been interested in
studying financial instability that could lead to bankruptcy in many areas such as
Altman (1968), Altman & GCG (1977) ), Zavgren (1985). Particularly in the
banking sector there are researchs by Boyd & Graham (1986), De Nicolo (2000),
Hesse & Cihak (2007), Soedarmono & ctg (2011), Rahman & ctg (2012), Fu & ctg
(2014), Chiaramonte & ctg (2015), Strobel (2015). These studies find the impact of
many factors on the financial stability of commercial banks. However, an issue that
is being debated is the impact of equity and credit risk on the financial stability of
commercial banks. In theory, equity plays an important role for a bank. Equity funds
not only finance the bank's investments but also help banks to be proactive in their
business operations, increasing their competitive capacity and securing their
credibility. In addition, the theory also shows that credit risk occurs will affect
immediately earnings of commercial banks. Since then, affecting the business
activities of commercial banks, creating instability.
Some studies by Furlong and Keeley (1989), Keeley (1990), Van and Roy (2003),
Jacob Oduor et al. (2017) show that equity helps reduce risk and increase stability.
Finance of banks. On the other hand, empirical studies have also shown that the
credit risks faced by banks with loans have led to the bank's loss of liquidity and
forced banks to bankruptcy. This result is also supported by recent research by Björn
Imbierowicz and Christian Rauch (2013).
In Vietnam, since the crisis of 2008-2009, the banking system of Vietnam has been
gradually recovering due to its active efforts in dealing with bad debts of each bank
in particular and the Government in general. Looking back at the instability of the
Vietnamese banking system over time, equity and credit risk play an important role.
Therefore, it can be said that, in the current context of Vietnam, the consideration
of the impact of equity, credit risk on the financial stability of banks is necessary,
especially in the mid-crisis period. by. Because determining the level and direction
of the impact of equity, credit risk on the financial stability of banks will help to
develop sound and sustainable banking governance policies. Starting from the
above, the topic "Impact of equity, credit risk on financial stability of Vietnamese
commercial banks" is necessary.
1.2. Gap in research
Based on the results of the empirical study, which will be presented in the next, the
research expects to fill some of the research gaps:
Firstly, based on prior research, research has focused on both the impact of equity
and credit risk on the financial stability of commercial banks. However, the research
goes in two different directions: the first one examines the effect of equity on the
financial stability of commercial banks such as Jacob Oduor et al. (2017), Aggrawal
et Jacques ( 2001); Rime (2001); Godlewski (2004); Hakenes and Schnabel (2010);
Abba et al. (2013); Vu Thi Hong (2015); Le Thanh Ngoc et al. (2015) ... the second
direction of studying the impact of credit risk on the financial stability of
commercial banks Björn Imbierowicz and Christian Rauch (2013); Beck & ctg
(2009); Consuelo Silva Buston (2012). Domestic research studies to measure the
impact of both equity and credit risk on the financial stability of Vietnamese
commercial banks are limited.
Second, the theories of research on the impact of equity on the financial stability of
banks reveal many contradictions. In the first place, the theory is that increasing the
equity will reduce profits, thereby reducing the financial stability of the bank. This
view is rooted in the debate surrounding the capital structure theory of Modigliani
and Miller (1958). Modigliani and Miller (1958) argue that capital structure does
not affect the value of the business. Secondly, higher equity will allow banks to
make better choices in their businesses while at the same time better controlling
credit activity, thereby increasing bank financial stability (Jensen and Meckling,
1976). These theories show that the direction of the impact of equity on the bank's
financial stability over time, and the likely impact of equity to The financial stability
of Vietnamese commercial banks is non-linear and inverted U. This implies that
increasing the equity ratio could help increase the financial stability of Vietnamese
commercial banks but only to a certain extent. If the equity ratio exceeds this level,
the increase in equity can reduce the financial stability of Vietnamese commercial
banks due to the decrease in business performance. Equity ratio at the point of
reversing the financial stability of Vietnamese commercial banks is the optimal ratio
of equity, at which the financial stability of Vietnamese commercial banks is the
highest. . A study to prove this non-linear impact exists and find optimal equity
thresholds that will increase the financial stability of Vietnamese commercial banks.
Third, in the context of the global financial crisis that took place in 2008 and 2009,
the economies of many countries were sharply reduced. In Vietnam, the world
economic crisis has also been affecting a lot: on the stock market, foreign investors
have the ability to recover capital and sell securities. Hence, it will negatively affect
foreign exchange reserves and stock market prices. Exports will decline, which both
affects the balance of international payments, trade deficit; It has also increased
labor force loss, negative impact on the labor market; The real estate market will
tend to stagnate and this market downturn will negatively affect other markets.
Some banks have lost their liquidity and withdraw their credit, which makes it
difficult for businesses to access the capital market; Increasing interest rates,
increasing capital costs, thus affecting business operations (Dinh Son Hung, 2010).
Empirical studies by Consuelo Silva Buston (2012); Jacob Oduor et al. (2017) found
that, under the influence of the economic crisis, the impact of equity and credit risk
on bank financial stability was altered. However, there are no studies in the country
that compare the impact of equity and credit risk on the financial stability of
Vietnamese commercial banks during and after the crisis. The global financial crisis
took place between 2008 and 2009.
These theories show that the direction of the impact of equity on the bank's financial
stability over time, and the likely impact of equity to The financial stability of
Vietnamese commercial banks is non-linear and inverted U. This implies that
increasing the equity ratio could help increase the financial stability of Vietnamese
commercial banks but only to a certain extent. If the equity ratio exceeds this level,
the increase in equity can reduce the financial stability of Vietnamese commercial
banks due to the decrease in business performance. Equity ratio at the point of
reversing the financial stability of Vietnamese commercial banks is the optimal ratio
of equity, at which the financial stability of Vietnamese commercial banks is the