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Credit risk of Vietnamese commercial banks: does capital structure matter?

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Abstract

The study was conducted to evaluate the impact of capital structure on the credit risk of Vietnamese commercial banks in 2012–2020. The variables representing the capital structure of banks are the ratio of customer deposits to total assets (CDEP) and non-deposit liabilities to total assets (NDEP). The study uses the non-performing loan ratio on total outstanding loans (NPL) as a proxy variable for credit risk. By using Pooled OLS, FEM, REM, FGLS, and SysGMM methods, the research results show that the CDEP positively impacts credit risk. Meanwhile, the NDEP has a negative impact on the credit risk of Vietnamese commercial banks. On that basis, the study proposes measures to reduce credit risk for Vietnamese commercial banks.

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Authors and Affiliations

  1. Ho Chi Minh City University of Banking, 36 Ton That Dam Street, Nguyen Thai Binh Ward, 1st District, Ho Chi Minh City, 700000, Vietnam

    Nam Pham Hai & Chi Le Ha Diem

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  1. Nam Pham Hai
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Appendix 1

Appendix 1

Table

Table 10 The effect of CS on CR
Full size table

10 shows the impact of capital structure on credit risk of Vietnamese commercial banks in the period 2012–2020. Estimation methods include Pooled OLS, FEM, REM, FGLS, and SysGMM. In this model, commercial banks’ capital structure is measured by bank capital to total assets, and non-performing loans to total outstanding loans measure credit risk. Among the regression methods, the SysGMM regression method solves the model’s defects, such as autocorrelation and heteroskedasticity. Therefore, the author uses regression results according to the SysGMM method for analysis.

The results of Table 10 show that bank capital positively impacts the NPL of Vietnamese commercial banks. Bank capital improves banks’ financial stability, is a buffer to help banks better respond to financial shocks, and meets international capital adequacy standards such as Basel II and Basel III. However, when the bank has more capital, the ability to absorb risk is better, and the bank tends to accept higher risk [12]. For Vietnamese commercial banks, bank capital is often used to finance medium and long-term credit portfolios. Therefore, the longer the loan term, the higher the credit risk, and the bank’s capital positively correlates with credit risk. If the bank uses capital inefficiently, finances high-risk projects and the capital management capacity cannot keep up with the bank’s capital growth rate, the credit risk for the bank will increase. However, in the research model, when regression by the SysGMM method, the bank capital variable is not statistically significant.

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Hai, N.P., Le Ha Diem, C. Credit risk of Vietnamese commercial banks: does capital structure matter?. J Bank Regul (2023). https://doi.org/10.1057/s41261-023-00229-4

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