The impact of bank competition to financial stability of Vietnam commercial bank

Nội dung text: The impact of bank competition to financial stability of Vietnam commercial bank

1. MINISTRY OF EDUCATION STATE BANK OF VIETNAM BANKING UNIVERSITY, HO CHI MINH CITY NGUYEN LUU TUYEN THE IMPACT OF BANK COMPETITION TO FINANCIAL STABILITY OF VIETNAM COMMERCIAL BANK DOCTOR OF PHILOSOPHY IN ECONOMICS THESIS SUMMARY Major: Finance – Banking Code : 62.34.02.01 Instructors: Doctor. Lam Thi Hong Hoa Doctor. Le Ho An Chau HO CHI MINH CITY - 2018
2. 1 CHAPTER 1: GENERAL INTRODUCTION 1.1. Practical context and reasons for choosing the topic Improving domestic and international competitiveness while ensuring the financial stability of the commercial banking system in Vietnam is one of the important objectives of Vietnam's banking and finance industry during 2011 - 2016. Over the past few years, the mergers, acquisitions and restructuring of banks' operations have been extremely active, under the scheme "Restructuring Credit Institutions (CIs) in 2011-2015" approved by the Prime Minister on 01/03/2012, with priority given to weak credit institutions; to carry out the merger, consolidation and acquisition of CIs on the principle of voluntariness; to increase chartered capital and handle bad debts of credit institutions and step by step restructure operation, management and administration. This resulted in a reduction in the number of banks in the system when weak banks were forced to merge. The mergers and acquisitions of commercial banks also raised concerns about the possibility of a decline in the competitiveness of the banking industry and the impact on the financial stability of Vietnam commercial banks. In the context of Vietnam joining the ASEAN Economic Community (AEC) by 2015, or the signing of important FTAs between Vietnam / ASEAN with India, Japan, South Korea , Australia & New Zealand, Chile, Eurasia, the trend as well as the requirement to improve the competitiveness of commercial banks in Vietnam and ensure the financial stability of commercial banks is one of the Important factors support this process. Trends and requirements to improve competition and financial stability of commercial banks are increasingly interested in different markets and is the subject of many debates. In recent years there have been several debates regarding the relationship between competition and the stability of the banking system (Beck, 2008; Carletti, 2008). The debates on this relationship have formed two contradictory views: "competition-fragility" and "competition-stability". From the standpoint of
3. 2 "competition -fragility", increasing bank competition reduces the marketpower, ank's profit margins and consequently decreases the franchisevalue of the bank (Berger et al., 2009). This encourages banks to take more risks to seek profits, causing instability in the banking system (Marcus, 1984; Keeley, 1990; Carletti and Hartmann, 2003). In contrast, the "competition – stability" view holds that there is a positive relationship between banking competition and the stability of the banking system. Increased competition will lead to the stability of the banking system and vice versa (Xiaoqing (Maggie) Fu et al., 2014). In a market where competition between banks is low, it can be more risky when large banks are often considered too important to fail and thus, when faced with difficulties in operating, those banks usually receive support from the government (Mishkin, 1999). In addition, in a low-competition market, large market-power banks will offer higher lending rates, which will cause difficulties for borrowers in repayment capacity and increase the risk exposure of the bank (Xiaoqing (Maggie) Fu et al., 2014). In contrast, in a market where competition among banks is high, lending rates are low; problems of“too-big-to fail”receiveless attention, and therefore positively impact on the stability of the banking system (Boyd and De Nicoló, 2005; Beck, 2006; Schaeck, 2006; Turk- Ariss, 2010). Studies supporting these two points suggest that the effects of competition on the stability of the banking system are inconsistent across countries. In addition, very few studies examine the relationship between competition and stability before and after the financial crisis (Fu et al, 2014; Boyd and De Nicoló, 2005; Beck, 2006; Schaeck, 2006; Turk-Ariss, 2010). Therefore this research is necessary to strengthen the practical evidences and theoretical foundation of the relationship between competition and stability of Vietnam commercial banks. This study aims to assess the relationship between competition and stability of the Vietnam commercial banks for updated period from
4. 3 2008 - 2016. This study also looks at this relationship in the context of the financial crisis of 2008 and 2009. Research results will also provide a basis for policy makers and stakeholders to better understand the impact of competition on the financial stability of commercial banks to set out approriate strategies and solutions. 1.2. Research objectives and research questions:  Research objectives: The overall objective of the thesis is to study the impact of competition on the financial stability of Vietnamese commercial banks by examining the relationship between "competitive - stable" and "competitive - fragile". From the results of the study, the thesis will discuss the appropriate policy implications. To achieve the overall goal, the thesis will in turn address three specific objectives: • Measuring the level of competition and analyzing factors affecting the competition of Vietnamese commercial banks. • Measuring financial stability and analysis of factors affecting the financial stability of Vietnamese commercial banks. • Examine the impact of competition on the financial stability of Vietnamese commercial banks by testing two hypotheses: "competition - stability" and "competition - fragility".  Research questions: To achieve the research objectives, the thesis responds to the following research questions: • What are the level of competition of Vietnam commercial banks in 2008- 2016? • What factors affect the level of competition of Vietnam commercial banks? • What are the level of financial stability of Vietnam commercial banks in 2008-2016?
5. 4 • What factors affect the financial stability of Vietnam commercial banks? • The impact of competition on financial stability of Vietnam commercial banks supports the "competition-stability" or "competitive-fragility" hypothesis? 1.3. Research Object and research scope: • Research object: The object of the study is the impact of competition on financial stability of commercial banks. In particular, the degree of competition represented by the Lener index and the financial stability is represented by the bank's bankruptcy risk level, Z-score, based on relevant theoretical background and research. • Research scope: Limited in 24 joint stock commercial banks in Vietnam. The study period is from 2008 to 2016. 1.4. Recearch methodology: Based on the financial report, annual report, public documents of commercial banks in Vietnam from 2008 to 2016, the Lerner Competitiveness Index was calculated according to Abba Lerner's formula (1934) to estimate and compare the level of competition of Vietnamese commercial banks in the period 2008 - 2016. Subsequently, the thesis inherited the Z-score calculation method for banks used in the research of Boyd & Graham (1986 ), Hannan & Hanweck (1988), Boyd & ctg (1993) to measure the financial stability of Vietnamese commercial banks. The study then uses models proposed by Raúl Osvaldo Fernández et al (2015) to test the relationship between competition and financial stability of Vietnamese commercial banks. To overcome the endogenous phenomena in the model, the thesis utilizes the tool change technique with the DGMM estimation, seeking evidence of the impact of competition on the financial stability of Vietnamese commercial banks in normal conditions and in crisis conditions.
6. 5 1.5. Research contribution The main research contributions include: Regarding scientific contributions: The thesis will supplement the empirical evidence on the level of competition and financial stability of Vietnam commercial banks in the period 2008 - 2016, and evaluate and verify the relationship of "competition - stability" and "competition - fragility" for Vietnam commercial banks. This is a new study where most of the current topics are either focused on evaluation of the competitiveness of Vietnamese commercial banks or financial stability of Vietnamese commercial banks. In-depth and specific studies about the quantitative impact of competition on the financial stability of Vietnamese commercial banks is very limited. In addition, although some studies in the world have evaluated the impact of competition on financial stability, most of those researches are for developed countries such as Europe and the Americas. This is a new and up-to-date research for Vietnam commercial banks in the period of 2008 - 2016, a representative for a developing country or a frontier market in which the financial systems are mainly developed based on the banking system. Regarding practical contributions: The research results will help Vietnam commercial banks better understand the current status of competition, stability, impact factors, trends and impacts of competition on financial stability of Vietnam commercial banks in the period of 2008 - 2016, from which there are strategies and solutions to enhance competitiveness and ensure financial stability. At the same time, research results will also help regulators and policy makers to better assess the level of competition, financial stability and the impact of competition on financial stability under normal conditions and in the crisis condition, which helps to establish appropriate regulatory policies to improve the competitiveness of Vietnamese commercial banks and to help ensure the financial stability of commercial banks in Vietnam.
7. 6 1.6. Thesis structure The structure of the thesis consists of 5 chapters: Chapter 1: Research Introduction Provide an overview of the research topic, including the context and reason for choosing the topic, research objectives, research questions, subjects and scope of research, research methodology, research contribution and the research structure. Chapter 2: Theoretical Background and Empirical Evidences for Banking Competition, Financial Stability and the Impact of Competition on Financial Stability Introduce theories and related research studies that have been developed to form the research model and to develop research hypotheses. Chapter 3: Research Methodology and Research Data Describe the research methodology and descriptive data. Chapter 4: Empirical Analysis of Banking Competition, Financial Stability and the Impact of Competition on Financial Stability of Vietnamese Commercial Banks in the Period 2008 - 2016 Presentation of research results on banking competition, financial stability and impact of competition on financial stability of Vietnamese commercial banks in the period of 2008 - 2016. Chapter 5: Conclusions and Policy Implications Present the main conclusions of the research
8. 7 CHAPTER 2: THEORY BASIS AND IMPERICAL EVIDENCE OF BANKING COMPETITION, FINANCIAL STABILITY AND THE IMPACT OF COMPETITION ON FINANCIAL STABILITY 2.1. Theoretical basis: 2.1.1. Theoretical basis of banking competition 2.1.1.1. Definition: According to Porter (1998), competition is gaining market share. The essence of competition is to seek profit, which is higher than the average profit that an enterprise has. The result of competition is the gradual deepening of profit margins in the industry, leading to a reduction in the price effect (1980). Nguyen Thanh Phong (2010) defines the competition of commercial banks as the ability created by the bank on the basis of maintaining and developing its inherent advantages in order to consolidate and expand its market share, increase profits and be able to resist and overcome adverse changes in the business environment. In summary, the level competition of commercial banks is the ability of the bank to create, maintain and develop the advantages to consolidate and expand market share; increase profits and be able to resist and overcome adverse changes in the business environment. 2.1.1.2. Measurement Method: The research on the world using different methods to measure level of bank competition, including SCP method based on SCP theory: structure - conduct - performance) and the non-structure method based on concentration ratios.  Market structures method  Non-structure method
9. 8 2.1.2. Theory about financial stability of commercial banks 2.1.2.1. Definition of financial stability According to Buiter (2008), financial stability will be ensured if the following factors are not present: (i) asset price bubbles; (ii) liquidity shortage; (iii) The insolvency of financial institutions threatens the stability of the system. According to the European Central Bank (ECB), financial stability is a state of financial institutions capable of absorbing shocks, minimizing major breakdowns that could cause significant harm to the process of allocating investment resources to more efficient channels. ECB argues that a financial institution is considered stable if it meets the following criteria: (i) it is possible to allocate effective resources from the savings channel to the investment channel; (ii) financial risks are assessed and determined accurately and reasonably for better control; (iii) Can absorb financial shocks as well as fluctuations in the real economy. In short, although there is no official definition of the term "financial stability", on the macro perspective, financial stability is a situation in which the financial system (financial market , financial institutions, financial infrastructure) perform its functions smoothly, contributing to the efficient allocation of resources of the economy. System-level risks are accurately assessed and managed effectively to avoid possible collapse of the financial system. At the level of commercial banks, financial stability can be understood as the state in which the organization operates smoothly, performs its function, operates stably and is able to withstand the shock from the external environment, and itself does not cause a shock to the economy. 2.1.2.2. Financial stability and financial instability of commercial banks At present, there is no consensus on an exact definition of the financial stability of banks. Studies on financial stability of commercial banks often consider and evaluate the "level of financial instability" as an approach to assessing "financial stability", and financial instability is the opposite of financial stability. The financial turmoil of commercial banks is often associated with a general banking panic that is related to a bank's shock exaggerated by the behavior of
10. 9 uninformed depositors, who suspect the bank's asset value is lower than the bank's liability value, then withdraw the deposits. When a bank encountered a sudden capital withdrawal by depositors, this can lead to the bank run and cause instability. Due to the majority of lending bank deposit should get when experiencing situations of sudden customer withdrawals of large amounts, the Bank could not immediately refund all the funds sent to the client.The delay paid due to inability to meet this could lead to a run on deposits prompted the Bank into bankruptcy status. The result is that the depositors will suffer damage unless they are the insurance company paid deposits.The fleeing the Bank spread increase unrest led to the banking crisis system.Many examples of the bank run took place, such as the fleeing from the US Bank the year 1930, the collapse of investment bank Bear Stearns in 2008. When a bank encounters a sudden withdrawal by depositors, this can lead to bank failure and cause instability. Because banks lend a large amount of their deposits, banks are unable to immediately repay all deposits to customers when they encounter unexpected situations where there is money withdrawal in large amounts. This inability to pay due to the inability to respond can lead to a runaway deposit that leaves the bank in bankruptcy. As a consequence, depositors will suffer losses unless they are covered by the insurance company. The widespread bank outbreak has increased the instability that has led to a systemic banking crisis. Many examples of bank failures have taken place, such as the failure of the US banks in the 1930s, the collapse of Bear Stearns investment bank in 2008. 2.1.2.3. Methods to measure financial stability and financial instability Financial stability of commercial banks is often measured indirectly through the assessment of financial instability and banking crisis either systematically or individually.
11. 10 (i) Measurement of systematic financial stability and financial instability In order to measure system financial stability, many studies use aggregate metrics for the whole system (Z-scores and distance to bankruptcy), with average or weighted of each rating factor by scale of each bank. The limitation of this approach is that it does not take into account the interrelationships between financial institutions, ie the ability to spread as a financial institution (ii) Measurement of individual financial stability and financial instability Based on Altman's research, many studies have subsequently applied the Z- score to assess bankruptcy risk in various industries. For the banking sector, there are studies by Boyd & Graham (1986), Hannan & Hanweck (1988), Soedarmono & ctg (2011). The degree of financial stability is quantified by Z-score in the banking sector studies and is calculated as follows: 푅 푖푡is the return on total assets of bank 푄 푖푡is the ratio of equity to total assets of bank 훿푅 푖 is the standard deviation of the bank's ROA 2.1.3. Theoretical background of competition and stability of the banking system From the traditional viewpoint of a "competition - fragility" relationship, a more competition or less centralized banking system increase instability. This is explained by the franchise value theory studied by Marcus (1984) and Keeley (1990), suggesting that competition motivates banks to pursue more risky strategies. These studies show thatless competition or a more exclusive monopoly of some banks will lead to higher franchise value of these banks, and may prevent excessive risky decisions of the bank's executives. Because when the Franchise value is
12. 11 higher, the opportunity cost of bankruptcy is higher, leading to the reluctance of bank executives and bank shareholders to participate in dangerousdecisions, thereby improving the quality of bank assets. Boot and Greenbaum (1993) and Allen and Gale (2000, 2004) show that in a competition environment, banks receive less information from their relationships with borrowers, making it difficult to check credit records and increase the risk and instability. Boyd et al. (2004) argue that banks with a higher level of presence or higher monopolies in a centralized banking system can increase profits and thereby reduce financial breachability by providing "Buffer Capital"to protect the system against macroeconomic shocks and external liquidity problem. From a "competition – stability" standpoint, a more competitive or less monopoly banking system will be more stable, in other words, less competitive or more monopoly banking system will be more unstable. This can be explained by the "too big to fail" theory proposed by Mishkin (1999) indicating that policymakers will be more concerned about the collapse of the bank when there are so few banks in the banking system. Thus, large banks are more likely to receive government guarantees or grants, which can create moral hazard problems, encourage dangerous decisions and increase instability of the banking system. Moreover, the spreadingrisk may increase in the centralized banking system with large banks. Caminal and Matutes (2002) argue that less competition can lead to easier credit granting and larger loans, which increases the probability of bank collapse. Boyd and De Nicolo (2005) argue that high monopoly banking systems allow banks to charge higher interest rates, and may encourage borrowers to take greater risks. Therefore, the amount of non-performing loans can increase, resulting in higher probability of bank’s bankruptcy. However, Martinez-Miera et al (2010) suggests that higher lending rates also bring higher interest income to banks. This offset effect can create a U-shaped relationship between bank competition and stability.
13. 12 2.2. Empirical evidences: 2.2.1. Empirical studies on the level of competition and the factors that influence the level of competition of financial institutions Competition in the banking sector has been a subject that has attracted the attention of many domestic and foreign researchers. Fungacova et al (2010) studied the market power of Russian banks in the period 2001-2007 using the Lerner index. Demirguc-Kunt and Peria (2010) study market power of the banking system in Jordan 1994-2006. Soedarmono et al (2011) studied the competitiveness of commercial banks in Asian countries and territories for the period 2001-2007. Bolt and Humphrey (2012) study the competitiveness of US banks, which use HHI, Lerner and H statistics to measure competition. Repkova (2012) examines the competitiveness of the Czech banking system for the period 2000-2010. Simpasa (2013) examines the level of competition and market structure in the Zambian banking system in Africa in the context of a dynamic market movement involving new and emerging foreign banks and privatization of State-owned banks. Laurent's (2013) study of regional bank competition in Europe, in which the author examines the degree of competition among EU banks in the period 2000-2010 to assess the behavior of banks Europe in this period. Hamza and Kachtouli (2014) examine the level of competition and market power of Islamic banks and commercial banks in the Middle East & North Africa and Southeast Asia for the period 2004-2009. Saibu (2015) studies the competitiveness and concentration of Nigerian banks for the period 2001 - 2013. Phan Thi Thom and Than Thi Thu Thuy (2015) study the impact of competition on the efficiency of cost and profit management of Vietnamese commercial banks in the period 2005 - 2014.
14. 13 Vo Xuan Vinh and Duong Thi Anh Tien (2017) studied the competitiveness and considered factors affecting the competitiveness of Vietnamese commercial banks in the period 2005-2014 2.2.2. Empirical studies on financial stability and factors affecting financial stability of commercial banks Currently, financial stability and factors affecting the financial stability of commercial banks are increasingly interested and attracted many research in the country as well as in the world. Hesse and Cihak (2007) analyze empirically the role of cooperative banks in stabilizing finances. Ivičić and Katt (2008) investigated the impact of macroeconomic variables and banking characteristics on the payment risk of banks in seven Central and Eastern European countries from 1996 to 2006. Soedarmono et al (2011) examined whether Asian banks were morally at risk in the 1997 Asian crisis. Rahman et al (2012) studies the relationship between bank ownership and risk and the impact of government regulation on capital. Fu et al (2014) examines the relationship between competition and financial stability, using information and data from 14 Pacific economies from 2003 to 2010 to examine the effects of bank competition, concentration, and regulations of nations on the fragility of banks which are determined by the bank's probability of bankruptcy and Z-score. Chiaramonte et al (2015) evaluates the accuracy of the Z-score, a widely used representative variable to measure the financial stability of banks, based on the sample of European banks from 12 countries in the period 2001-2011. Strobel and Lepetit (2015) use the Z-score model to evaluate and consider the relationship between Z-score and the bankruptcy probability of banks, which provide a more refined measurement without pressure to set the next distribution assumptions.
15. 14 Hammami & Boubaker (2015) examines the effect of ownership structure on bank risk, using information on financial statements of 72 commercial banks from 10 Middle East and North Africa (MENA) countries over 2000 to 2010. Nguyen Minh Ha and Nguyen Ba Huong (2016) identify the factors that influence the bankruptcy risk of Vietnamese banks by using the Z-score method, thus suggesting appropriate policies to enhance stability and health in operation of joint stock commercial banks in Vietnam. 2.2.3. Empirical evidence of competition and stability of the banking system There have been a number of studies showing that the higher the level of bank competition, the more likely it is that financial instability will be mitigated through a decline in market power, which in turn will reduce profits and lower the value of the brand. These studies support the "competition - fragility" view. In view of this, banks are encouraged to take more risks to increase profitability and to reduce the quality of their loan portfolio (Marcus, 1984, Keeley, 1990 and Carletti and Hartmaan, 2003). However, many recent studies have advocated a "competition-stability" view. Beck et al. (2006) studied a group of 69 countries and found that countries with low market concentration or high competition were less likely to suffer financial crisis. Boyd and De Nicolo (2005) argue that the greater the market power, or the lower the competition in the lending markets, the higher the risk for banks because higher interest rates make repayments to customers more difficult. This can exacerbate ethical risk, and at the same time, higher interest rates will attract higher risk borrowers. In addition, in highly centralized monopolies, financial institutions may believe that they are "too large to collapse" and this can lead to riskier investments (Berger et al. , 2008). Other studies have recently applied the Lerner competitiveness index and measured bank stability through the Z-score to examine the relationship between competition and the stability of the banking system such as Berger et al. (2008), Turk-Ariss (2010), Liu et al. (2010).
16. 15 2.3. Evaluating prior studies 2.3.1. Evaluating previous studies on competition and factors affecting the level of competition of commercial banks It can be seen that there are a number of different studies with different countries, using different methods for differential results related to the measurement of competition and factors affecting the level of competition of commercial banks. Previous studies have identified a number of factors affecting the level of competition of commercial banks, including: The size of the bank Capital size Outstanding loans Profit cost management effectiveness 2.3.2. Review previous studies on financial stability and factors affecting the financial stability of commercial banks: There are many different studies with different countries that use the Z-score to measure the bank's financial stability, measuring the level of risk exposure to bankruptcy or financial instability of the bank. The studies yielded different results related to the issue of measuring financial stability and factors affecting the financial stability of commercial banks. The results of the study show that Z-score is a simple and less time-consuming and cost-effective method of measuring financial stability in the banking sector. Previous studies have identified a number of factors that affect the financial stability of commercial banks, including: The size of the bank Capital size Outstanding loans Profit cost management effectiveness
17. 16 2.3.3. Review previous studies on the impact of competition on financial stability of commercial banks There are different studies with different countries, using different methods to differentiate the relationship between competition and financial stability of commercial banks. This is the basis for the development of the thesis. Specifically: the first study of the thesis based on the results of Marcus (1984), Keeley (1990), Carletti, and Hartmaan (2003) studies suggests that the higher the level of bank competition, the more likely it is to lead to financial instability, mainly through the decline of market power, which consequently reduces profits, and decreases the value of the brand. These studies support the "competition - fragility" view. The second research point is based on the findings of Boyd and De Nicolo (2005), Beck et al. (2006), Turk-Ariss (2010), Liu et al. (2010), suggesting that the higher the level of bank competition, the more financial stability the banks will be. The reason is that the greater the market power or the lower the level of bank competition in lending markets, the higher the risk for the bank, the higher the interest rate will be and should be more difficult for borrowers to pay. This can exacerbate ethical risk, and at the same time, higher interest rates will attract higher risk borrowers. In addition, in highly centralized monopolies, financial institutions may believe that they are "too large to collapse" and this can lead to riskier investments (Berger et al. , 2008). In this study, the author uses the Z-score to represent financial stability and the Lerner index to represent the level of competition of Vietnamese commercial banks. The thesis also examines the impact of intrinsic factors within the banks, as well as external factors in the macro environment, under normal conditions and in crisis conditions, to test two above hypotheses. The thesis analyzes the latest updated data of commercial banks in Vietnam for the period of 2008 - 2016. The research results suggest solutions to help Vietnamese and SBV managers to have appropriate strategies and solutions.
18. 17 CHAPTER 3: RESEARCH METHODOLOGY AND RESEARCH DATA 3.1. Researh data The study was conducted with a sample of 24 commercial banks in Vietnam from 2008 to 2016. Data for internal variables within the bank were collected from the annual financial statements of commercial banks. Data for external factors of the macro environment are collected from formal sources such as the World Economic Outlook (WEO), data set of the International Monetary Fund (IMF), and General Statistics Office of Vietnam. 3.2. Research Methodology: 3.2.1. Measure and analyse the factors impact the level of competition of commercial banks 3.2.1.1. Measure the level of competition of commercial banks To proxy the degree of competition of commercial banks, we use the Lerner index which has been used by Berger et al. (2008), Fernández de Guevara et al. (2005), Berger et al. Maudos and Solís (2009), Xiaoqing (Maggie) Fu et al. (2014). The Lerner index for banks is calculated as follows: 푃 − 퐿푒 푛푒 = 푖푡 푖푡 푃푖푡 Where Pit is the output price of bank i in year t, calculated by the ratio of total income to total assets. MCitis the marginal cost of bank i in year t. However, marginal cost can not be observed directly, so it is estimated based on the function of the total bank cost (Ariss, 2010; Fenandez de Guevara et al., 2005; Xiaoqing (Maggie) Fu et al, 2014). 3.2.1.2. Factors impact the level of competition of commercial banks Inheriting related studies, the thesis use below model to analyze the factors affecting the level of competition of commercial banks: Lernerit = α + β1 Lernerit-1 + β2 EQTAit + β3 LOANTAit + β4 ROEit + β5 CIRit + β6BANKSIZEit + β7 GDPt + β8 INFt + uit(3)
19. 18 Besides, to consider the impact of these factors on the level of competition of Vietnam commercial banks under normal conditions and crisis conditions, we add to model (1) a CRISIS dummy variable. The dummy variable value is 1 during the economic crisis of 2008-2009 and is 0 in the remaining years. Specific models are as follows: Lernerit = α + β1 Lernerit-1 + β2 EQTAit + β3 LOANTAit + β4 ROEit + β5 CIRit + β6 BANKSIZEit+ β7 GDPt + β8 INFt + β9 CRISISt + uit (4) 3.2.2. Measure and analyse factors affecting the stability of commercial banks in Vietnam 3.2.2.1. Measure the stability of commercial banks in Vietnam There have been many studies that developed the methods of measuring commercial bank stability, most of which use Z-scores. In this study, we follow the studies of Boyd & Graham (1986Hannan & Hanweck (1988), and Boyd & Ctg (1993) to useZ-scores, which are calculated as follows: 푅 푖푡 + 푄 푖푡 푍푠 표 푒푖푡 = 훿푅 푖 Where: 푍푠 표 푒푖푡is the Z-score measures the bank i 's financial stability in year t. 푅 푖푡is the return on total assets of bank i in year t, calculated as the after-tax profit divided by total assets. 푄 푖푡is the ratio of equity to total assets of bank i in year t, calculated by the average equity divided by total assets. 훿푅 푖 is the standard deviation of the bank's ROA in the study period p.
20. 19 According to the above formula, the lower the Z-score, the lower the financial stability of the bank. In contrast, the higher the Z-score, the higher the financial stability of the bank. 3.2.2.2. Factors affecting the stability of commercial banks in Vietnam Inheriting previous studies, the thesis builds a model for analyzing the factors affecting the financial stability of Vietnamese commercial banks as follows: 푙푛푍푠 표 푒푖,푡 = 훼 + 훿푙푛푍푠 표 푒푖,푡−1 + 훽1( 푄 )푖푡 + 훽2(퐿 )푖푡 + 훽3(퐿퐿푃)푖푡 + 훽4( 푅)푖푡 + 훽5(푅 )푖푡 + 훽6( 퐾푆 푍 )푖푡 + 훽7(퐿 )푖푡 + 훽8( 푃)푡 + 훽9( 퐹)푡 + 훽10( 푅 푆 푆)푡 + 휀푖푡 (6) 3.2.3. Empirical Model to study the impact of bank competition to financial stability To search for empirical evidence for "competition –stability" and "competition – fragility" views, we use dynamic model as follows 2 푙푛푍푠 표 푒푖푡 = 훼푖푡 + 훿푙푛푍푠 표 푒푖푡−1 + 훽1퐿푒 푛푒 푖푡 + 훽2퐿푒 푛푒 푖푡 + 훽3 퐾푆 푍 푖푡 + 훽4퐿 푖푡 + 훽5 푊 푖푡 + 휀푖푡 (7) In addition, in order to find evidence of the impact of competition on the stability of commercial banks under crisis conditions, we add the crisis dummy variable representing Period of financial crisis. The dummy variable value is 1 in 2008, 2009 and is set to 0 in the remaining years. Specific models are as follows: 2 푙푛푍푠 표 푒푖푡 = 훼푖푡 + 훿푙푛푍푠 표 푒푖푡−1 + 훽1퐿푒 푛푒 푖푡 + 훽2퐿푒 푛푒 푖푡 + 훽3 푅 푆 푆푡 + 훽4 퐾푆 푍 푖푡 + 훽5퐿 푖푡 + 훽6 푊 푖푡 + 휀푖푡 (8) The dual impact of competition in crisis conditions on the stability of commercial banks is assessed by the lerner x crisis, as follows: 푙푛푍푠 표 푒푖푡 = 훼푖푡 + 훿푙푛푍푠 표 푒푖푡−1 + 훽1퐿푒 푛푒 푖푡 + 훽2퐿푒 푛푒 푖푡 × 푅 푆 푆푡 + 훽3 퐾푆 푍 푖푡 + 훽4퐿 푖푡 + 훽5 푊 푖푡 + 휀푖푡 (9)
21. 20 3.2. Estimation methodology The thesis estimated models (3), (4), (5), (6) using SGMM method. Model reliability tests performed include: Autocorrelation test of the residual: According to Arellano & Bond (1991), the GMM estimate requires a first order correlation and no quadratic correlation. Model fitment tests and representative variables: Similar to other models, model fit can be done through F-tests. The models (7), (8), (9) are estimated by the Difference GMM (DGMM) method of Arellano & Bond (1991).
22. 21 CHAPTER 4: ANALYSIS OF BANKING COMPETITION, FINANCIAL STABILITY AND IMPACT OF COMPETITION TO FINANCIAL STABILITY OF VIETNAMESE COMMERCIAL BANK IN 2008 – 2016 4.1. Overview of research sample Table 4.1: Descriptive Statistics of sample Variables Obs Means Std. Dev. Min Max Dependant variable Zscore 216 24,6960 12,1832 1,3217 62,1955 Lerner 216 0,2958 0,0849 0,0214 0,6085 Independant variable BANKSIZE 216 17,9791 1,2564 14,6987 20,7299 LOANTA 216 0,5113 0,1564 0,0047 0,8517 CIR 216 0,8932 0,0795 0,6137 1,2187 ROE 216 0,0843 0,0866 -0,8200 0,2846 GDP 216 0,0592 0,0048 0,0525 0,0668 INF 216 0,0904 0,0693 0,0063 0,2312 EQTA 216 0,1125 0,0811 0,0241 0,9994 Source: Calculating result from Stata The correlations matrix between variables is as follow:
23. 22 Table 4.2: correlations matrix between variables zscore banksize eqta ltd llp loanta cir roe gdp inf lerner own crisis zscore 1.0000 banksize -0.2659 1.0000 eqta 0.3435 -0.6333 1.0000 ltd 0.4107 -0.2796 0.1407 1.0000 llp 0.0103 0.0782 -0.0435 -0.0304 1.0000 loanta 0.2298 0.1380 -0.1442 0.4789 0.0254 1.0000 cir -0.1197 0.0653 -0.2918 -0.2771 0.0320 -0.0446 1.0000 roe -0.0151 0.2982 -0.1733 0.1787 -0.0029 0.1851 -0.6400 1.0000 gdp -0.1419 0.1884 -0.1417 -0.0528 0.0837 0.0309 0.0205 -0.0321 1.0000 inf 0.2151 -0.3193 0.2308 0.2177 -0.0916 -0.1263 -0.1737 0.0773 -0.2286 1.0000 lerner 0.2213 -0.5132 0.5292 0.3601 -0.0887 -0.0324 -0.8412 0.3823 -0.1033 0.2953 1.0000 own -0.2320 0.4664 -0.2206 -0.1299 -0.0443 0.0798 -0.1273 0.1829 0.0477 -0.1814 -0.0447 1.0000 crisis 0.1676 -0.2766 0.1855 0.2004 -0.0538 -0.0492 -0.2595 0.1459 0.1385 0.5375 0.3908 -0.1877 1.0000 Source: Calculating result from Stata 4.2. Measure and analyze the factors affecting the level of competition of Vietnamese commercial banks in the period 2008-2016 4.2.1. Measure the level of competition of Vietnamese commercial banks in the period 2008-2016 Based on the calculation formula of Abba Lerner (1934), the author calculates the Lerner index for 24 commercial banks in Vietnam from 2008 to 2016. Financial data were collected from 24 commercial banks in Vietnam for the total number of observations of 216. Lerner's calculation results are shown in Appendix 2, whereby the Lerner index is the highest in the nine years 2008-2016 of 60.85% belonging to TIENPB in 2008, the lowest in 9 years 2008-2016 is 2, 14% in TIENPB in 2011, Lerner average in 9 years in 2008-2016 of commercial banks in Vietnam reached 29.58%. Compared with the studies conducted in other countries and regions in the world, Lerner of commercial banks in Vietnam in the period 2008-2016 was 29.58% higher than 26.53% of Indonesia in 2003 - 2010, 26.71% of Pakistan during 2003-2010 (Fu et al, 2014) and much lower than Singapore's 48.89%, China's 43.43% (Fu et al, 2014). Thus, when using Lerner to measure the
24. 23 level of competition of commercial banks, the results show that the level of competition of commercial banks in Vietnam in the period 2008-2016 is quite fierce compared to other countries in Europe, Asia and the world. 4.2.2. Factors affecting the level of competition of commercial banks in Vietnam for the period 2008-2016 Regression results show that the 8 variables proposed in the model have affect to the level of competition of Vietnamese commercial banks, including the prior year competition index, the average equity on capital ratio, loan on total assets, the ratio of operating expenses to operating income, return on equity, bank size, economic growth rate, and inflation rate . 4.3. Measure and analyze the factors affecting the financial stability of Vietnamese commercial banks in the period 2008-2016 4.3.1. Measure the financial stability of Vietnamese commercial banks Based on the formula of Boyd & Graham (1986), Hannan & Hanweck (1988), Boyd et al (1993), Strobel & Lepetit (2013, 2015), the thesis calculate the Z-score for 24 Vietnam commercial Banks from 2008 to 2016. Financial data was collected from 24 commercial banks in Vietnam for a total of 216 observations. The highest Zscore index in 9 years from 2008-2016 is 62.20 belongs to SCB in 2008, the lowest in 9 years 2008-2016 is 1.32 belongs to TIENPB in 2016, Zscore average in 9 years in 2008-2016 of commercial banks in Vietnam reached 24.7 , lower than the level of 32.65 in 2005-2013 (Hoang Cong Gia Khanh & Tran Hung Son, 2015). Average Zscore of commercial banks in Vietnam for the period 2008-2016 is at 24,70. Compared with other studies conducted in other countries and regions of the world, the Zscore of the commercial banks in Vietnam in research period is only higher than the level of 23.89 of Malaysia in 1995-2008 (Rahman et al, 2012) and much lower than the 30.59 level of the Asia-Pacific region for the period 2003-2009 (Fu et al, 2014); lower than the average level of 41.78 for the 12 Asian countries for the period 2001-2007 (Soedarmono 2011); lower than the level of 46.50 of
25. 24 commercial banks in the OECD period 1994-2004 (Hesse & Cihák, 2007); lower than the level of 86.57 of the average 12 stable operation countries in Europe in period 2008-2011 ( Chiaramonte et al, 2015). The financial stability of Vietnam commercial banks measured by Zscore is quite low. In comparison with other countries in Asia and the world, the activities of Vietnamese commercial banks are more unstable. 4.3.2. Factors affecting the financial stability of Vietnamese commercial banks in the period of 2008 - 2016 The dynamics of the factors affecting the financial stability of Vietnamese commercial banks is measured by the SGMMM. The model (5) looks at the factors that affect the financial stability of Vietnamese commercial banks under normal conditions while the model (6) considers the impact in the context of crisis condition. Estimated results are as follows: Regression results show that the 8 variables proposed in the model have affect to the financial stability of Vietnamese commercial banks including prior year financial stability index, the average equity rate on total assets, loan to total assets, operating expense on operating income, return on equity, bank size, business growth rate and inflation rate. Two variables related to loans on deposits ratio and the risk provision are not statistically significant. 4.4. Impact of competition on financial stability in Vietnam commercial banks in the period 2008 - 2016 Table 4.6 presents results of models estimation by DGMM method. Dependent variables used in the model to assess the impact of competition on the stability of Vietnamese commercial banks are Z-scores. Estimates for each dependent variable are conducted in the following order: (i) consideration of the impact of competition on the stability of the Vietnamese commercial bank; (ii) consider the impact of the financial crisis on the stability of the Vietnamese
26. 25 commercial banks; (iii) consider the dual effects of competition in crisis conditions on the stability of Vietnamese commercial banks. Table 4.6: Model estimation results: Dependant variables: Zscore (7) (8) (9) -0.0899 0.0528 -0.0647 lnZscoreit−1 (0.0711) (0.0415) (0.0466) 4.4571 3.6892 0.7913* Lernerit (0.6877) (0.6477) (0.3993) -5.0216 -4.8862 2 Lernerit (1.0629) (1.1226) -0.2870 -0.2706 -0.3042 BANKSIZE푖푡 (0.0237) (0.0224) (0.0279) -0.1392 -0.1177 -0.1538 LOANTA푖푡 (0.0571) (0.1386) (0.1452) 0.2601 0.0189 0.0627 OWNit (0.0936) (0.0432) (0.0528) -0.0348 CRISIS푡 (0.0077) -0.0677 Lernerit × 푅 푆 푆t (0.0276) AR (1) p-value 0.036 0.041 0.005 AR (1) p-value 0.932 0.424 0.424 Hansen p-value 0.198 0.143 0.178 Number of groups 24 24 24 Number of instruments 22 23 22
27. 26 Second stage F-test p-value 0.000 0.000 0.000 , , * statistical significant at 1%, 5%, 10% Source: calculation result from Stata Estimated results that all three models have a p-value of AR (1) test less than 5% and have a p-value of AR (2) test greater than meaning level of 5%. Therefore, the model has a first ordered correlation but nosecond ordered - correlation of the residual. At the same time, the Hansen test in all three models has a p-value greater than 5%, meaning that the instrument variables used in the model are appropriate. On the other hand, the p-value of the F test is also less than the 5% significance level, indicating that the estimated model fit the panel data reasonably well. Another constraint using the DGMM method is also satisfied that ia the number of tool variables does not exceed the number of observation groups. Such models used ensure reliability for analysis. With Z-score variable, the results show that the regression coefficients of lerner and lerner2 in (7) and (8) are statistically significant at 1%. In addition, the regression coefficient of lerner is positive while the regression coefficient of the lerner2 is negative, indicating that there exists an inverse U-shape nonlinear relationship between the two variables lerner and Z-score. Specifically, the higher the lerner indexthe higher Z-score. In other word, increased banking competition results in greater stability of Vietnam banking system. This result is consistent with studies by Boyd et al. (2006), De Nicolo and Loukoianova (2006) supporting for a "competition – stability" hypothesis. However, when the lerner index exceeds a certain limit, the Z-score will decrease which means increase the instability of Vietnam banking system. This inverse U-shaped nonlinear relationship has also been shown in studies by Ariss (2010), Liu et al. (2010).
28. 27 The results of the model (8) also show evidence of financial crisis impact on the stability of the commercial banking system in Vietnam. Specifically, the regression coefficient of the crisis variable is statistically significant at 1% and negative. This shows that when the financial crisis occurs, there will be a negative impact on the stability of Vietnam commercial banks. In addition, the results of model (9) also show evidence of the dual effects of competition in the context of the financial crisis on the stability of the banking system. The regression coefficient of the lernerxcrisis variable was statistically significant at 5% and negative. This indicates that when the financial crisis occurs, competition will have a negative impact on the stability of Vietnam commercial banks.
29. CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 5.1. Results and main contributions of the study 5.1.1. Results of the study First, the thesis provides empirical evidence on the impact of macro and micro factors to the level of banking competition. Secondly, the thesis examined the degree of financial stability of Vietnamese commercial banks by Zscore, examining the differences in the financial stability of bank groups with different ownership and distribution patterns, as well as the factors affecting the financial stability of Vietnamese commercial banks under normal conditions and in crisis conditions. Thirdly, the thesis examines the impact of competition on stability by testing "competition - stability" and "competition - fragility" views for Vietnamese commercial banks. Specifically, when the level of competition increases, it will help Vietnamese commercial banks to be more stable. However, if the level of competition exceeds a certain threshold, it will cause instability. This implies that the relationship between competition and stability of commercial banks in Vietnam is a nonlinear U-shaped inverted relationship. In addition, the results of this thesis also show that in the context of financial crisis, instability as well as bad debts of commercial banks in Vietnam are increasing. At the same time, in the context of crisis, competition can cause instability for commercial banks in Vietnam. 5.1.2. Main contributions of the study This study uses recent updated research data by the end of 2016, which is the latest assessment of competition and financial stability of Vietnamese commercial banks, a representative for developing countries or is a frontier market in which the financial system develops primarily on the banking system. The thesis measures and evaluates the level of competition, financial stability and the impact of competition on the stability of Vietnamese commercial banks under normal and crisis conditions.
30. The thesis examines the impact of intrinsic factors within banks, as well as the impact of macro factors on the level of competition and the degree of financial stability of Vietnamese commercial banks. In addition, the thesis compares with previous domestic and foreign studies with the same calculation method to assess the level of competition and financial stability of Vietnamese commercial banks over the years; At the same time, the thesis also analyses and compares with the level of competition and financial stability of banking groups with different types of ownership. The use of the DGMM regression method can overcome the endogenous phenomena and produce more reliable estimation results. From that result, the study provides an appropriate assessment of the impact of competition on the financial stability of Vietnamese commercial banks. From the results of the analysis, bank managers, authorities and policy makers can develop appropriate strategies, solutions and policies to enhance the competitiveness of Vietnamese commercial banks and ensure the financial stability of commercial banks in Vietnam. 5.2. Policy implications to improve competitiveness and financial stability of Vietnamese commercial banks Based on the research results, the thesis draws some policy implications as follows: 5.2.1. For management of Vietnamese commercial bank First of all, in terms of credit activity, under intense competitive pressure in the Vietnamese banking market, banks should avoid loosening lending conditions in order to compete for market share and customers. Secondly, it is necessary to strengthen the equity of commercial banks. As banks expand their operations, their total assets and size increase, therefore, commercial banks need to actively increase their equity to ensure that their shareholding in total assets does not fall.
31. Thirdly, commercial banks need to improve the quality of their human resources, improve their professional qualifications, and their ability to manage and operate their business in a safe, effective and cost-effective manner, provide added value not only for the bank, but also for customers, and for the economy. Fourth, in terms of products, banks need to have solutions to diversify and improve the quality of their products and services in order to improve their competitiveness and increase their efficiency. Fifth, banks should focus on modern technology development. Modern technology is a precondition for the deployment of new types of services, quick and complete information updates, while minimizing risks. Sixth, on the effectiveness of cost management, bank executives in business operations need to manage well the bank's expenses and revenues. Seventh, it is necessary to actively deal with the macroeconomic fluctuations of the economy as these variables are often beyond the control of commercial banks. 5.2.2. For State Bank of Vietnam Firstly, the Government and the State Bank of Vietnam should take measures to encourage and promote commercial banks to carry out fair competition in the whole system. Secondly, in parallel with creating an environment that encourages healthy competition, the Government and the State Bank of Vietnam need to increase the quality of credit inspection and supervision toghether with credit growth control to limit risks. Thirdly, the State Bank should have solutions to support the enhancement of cooperation in banking technology of the commercial banking system. Fourth, the State Bank should also focus on the development of mechanisms and policies for new services, payment instruments and payment systems, creating a basis for developing payment on the breadth and improving the quality of interbank payment as well as clearing services.