Bank Risk, Capitalisation and Technical Efficiency in Vietnamese Banking

Abstract

We investigate the interrelationships between efficiency, capital and risk in Vietnamese commercial banks by using the three-stage least squares in a simultaneous equation framework. The efficiency scores of individual bank are obtained from the Data Envelopment Analysis with the use of financial ratios. Our results show that more diversified banks tend to be higher risk-taking and poor performance. We also find that the negative relationship between bank risk and capital, suggesting that credit risk and financial leverage are reinforcing each other. In addition, our findings also indicate that an increase in bank efficiency precedes an increase in risk. Finally, the findings suggest that more efficient banks and lower credit risk are associated with higher capital levels. Therefore, the results have potentially important implications for bank prudential supervision and underline the importance of increasing the minimum charter capital requirement in the future to support financial stability objectives.