Master thesis: The effect of liquidity creation on bank performance - Empirical evidence from Vietnamese commercial banks

Vietnam's commercial banking sector faces significant challenges in maintaining operational efficiency amidst rapid credit growth, asset expansion, and rising non-performing loan (NPL) risks. In this dynamic environment, understanding the nuanced impact of liquidity creation (LC) on bank performance is paramount for ensuring sustainable growth. LC, a fundamental banking function involving maturity transformation, inherently presents a trade-off between profitability and financial safety. Therefore, a comprehensive assessment that incorporates both internal risk factors and external macroeconomic variables is crucial to inform strategic decision-making and enhance the stability of the financial system. This study aims to shed light on this complex relationship within the specific context of Vietnamese commercial banks.

Policymakers and regulators in the banking sector, bank managers, financial analysts, and academic researchers interested in banking performance, liquidity management, and financial stability in emerging markets, particularly Vietnam.

This master's thesis investigates the effect of liquidity creation (LC) on the performance of 30 Vietnamese commercial banks over the period 2015-2025. Facing rapid credit expansion and macroeconomic volatility, the banking sector's operational efficiency and stability are critical. The study measures bank performance using Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM), while controlling for bank-specific factors like Non-Performing Loan (NPL) ratio, Capital Adequacy Ratio (CAR), bank size (SIZE), and operating cost ratio (COST), alongside macroeconomic variables such as GDP growth (GDPG), inflation rate (INFL), and interest rate (INT). Employing panel data regression models including Pooled OLS, Fixed Effects Model (FEM), and Random Effects Model (REM), the research utilizes the Hausman test to determine the optimal specification. Crucially, the Feasible Generalized Least Squares (FGLS) method is applied to mitigate heteroskedasticity and serial correlation, enhancing the robustness of coefficient estimation. Empirical findings indicate that liquidity creation positively influences bank performance, reflected in improved ROA, ROE, and NIM, although the magnitude of this effect is modest and contingent on individual bank risk management quality. The NPL ratio consistently demonstrates the strongest negative relationship with profitability, underscoring the critical importance of asset quality. Furthermore, GDP growth contributes positively to bank efficiency, whereas elevated inflation and interest rates tend to diminish profitability. These results emphasize that sustainable banking growth transcends mere expansion of liquidity creation, necessitating robust internal governance, effective NPL control, cost efficiency, and strong resilience to macroeconomic fluctuations.