The impact of bank competition on bank stability in Vietnam: The moderating role of shadow banking

Abstract

This paper aims to examine the moderating role of shadow banking in relation to the impact of bank competition on bank stability over a period from 2016 to 2021 in Vietnam. After building a bank stability index by combining the principal components of CAMELS through Principal Component Analysis (PCA), and the Lerner index as a measure of bank competition, this research uses panel corrected standard errors (PCSE) to analyze data of 20 Vietnamese commercial banks over a period from 2016 to 2021. As a result, the research shows that shadow banking reduces the positive impact of bank competition on bank stability in Vietnam despite it being considered a competitive strategy of banks. Furthermore, the research also indicates the positive role of bank size, equity to total assets, state ownership, and banking sector development for enhancing bank stability, while the opposite impact can be seen in the case of inflation. These results can help authorities in the banking sector and commercial banks in Vietnam to take appropriate measures to actively supervise or carefully implement shadow banking services in order to ensure bank stability.