Bank asset allocation and finance structure under uncertainty in Vietnam

Abstract

PurposeThe paper investigates the link between uncertainty and banks' balance sheet reactions.Design/methodology/approachThe study employs bank-level data in Vietnam during 2007–2019 to measure micro uncertainty in banking through the dispersion of bank-level shocks. Empirical regressions are performed by the two-step system generalized method of moments (GMM) estimator and then verified using the least squares dummy variable corrected (LSDVC) technique.FindingsBanks tend to reduce risky loans, hoard more liquidity and decrease financial leverage in response to higher uncertainty. The relationship between uncertainty and banks' balance sheet reactions is more pronounced for banks that suffer more credit risk and overall risk, thus supporting the precautionary motive of banks. Additionally, uncertainty also leads to a decline in the Net Stable Funding Ratio (NSFR) under Basel III, implying that banks may fail to find a more stable source of funding and be more subject to maturity mismatch during periods of higher uncertainty.Originality/valueThe paper is the first to explore comprehensively the relationship between uncertainty and banks' balance sheet aspects as simultaneously estimated by bank loans, bank liquidity and bank leverage. While many other uncertainty measures display aggregate uncertainty sources, an important contribution in this study is to anatomize uncertainty originating exclusively from banking at a disaggregate level. Besides, shedding light on how uncertainty drives bank funding liquidity as captured by the NSFR under Basel III is entirely novel in the literature.