Does Bank Liquidity Risk Lead to Bank's Operational Efficiency? A Study in Vietnam

Abstract

Purpose: This paper studies the factors affecting liquidity risk and examines the impact of liquidity risk on the operational efficiency of commercial banks in Vietnam in the period from 2010 to 2020. Design/methodology/approach: By using the concept of the commercial loan theory, efficient structure theory, market power theory, and trade theory, this paper first applies the pooled multi-variable regression method to analyze the impact of liquidity risk on the operational efficiency of banks in Vietnam in the period 2010 - 2020 on Stata software. We then use the fixed-effects and random-effects models to look at differences between cross-objects in analyzing the impact of factors on liquidity risk. Finally, we employ the feasible general least squares method to eliminate errors due to each bank's time, characteristics and handle the problem of autocorrelation and multicollinearity. Findings: We find that the bank's liquidity risk measured by the difference between credit and mobilized capital on total assets, credit to mobilized capital, and equity to total assets ratio is mainly influenced by banks' both internal and macro variables but internal variables are more important. At the same time, the performance of Vietnamese commercial banks is presented by using return on total assets, return on equity, and net profit margin. We also find that rising income from interest increases liquidity risk. If there is an unexpected shock, the bank will fall into a liquidity shortage and increase liquidity risk. Originality/value: All our findings are original and new in the literature. Implications: Our findings suggest that banks with growth in credit activities tend to increase liquidity risk. If there is an unexpected shock, the bank will fall into a liquidity shortage and increase liquidity risk. In general, if the risk of rising inflation is forecasted, Government will impose policies to control the money supply and inflation and require commercial banks to control liquidity and ensure banking activities strictly. In addition, we find that liquidity risk could have the opposite effect. All the above findings are our contributions to the literature. Our findings are useful in making recommendations for banks in creating strategies to improve operational efficiency towards the sustainable development of banks.