Bank Size, Ownership and Risk-Taking Behavior: An Empirical Study of Vietnamese Commercial Banks

Abstract

This paper studies the relationship between bank size and its risk-taking behavior amongst Vietnamese commercial banks, accounting for the contemporaneous impact from the government ownership on this size effect on the back of banking theories and empirical research. Using various dynamic econometrics frameworks on an unbalanced panel data of 30 Vietnamese commercial banks over the period of 2006 – 2015, the results across specifications reveals that bank size is positively associated with higher insolvency risk amongst examined institutions. In terms of ownership structure, there has been no realized response of both bank size effect and bank risk to the change in government shareholdings whereas foreign ownership is shown to be negatively correlated with risk-taking level. Governance factors are also included into our specifications as a mean to explain how effectively the governance mechanisms amongst Vietnamese banks work against heightening risk level. Interestingly we document an adverse effect of strengthened governance on bank risk or alternatively, better governance does not help to alleviate the burden of risk but magnifies it. Further, our robustness analysis indicates that the lackluster of capitalization is the key driver of lower Z-scores amongst larger commercial banks in Vietnam which carries with it meaningful implications for policymakers on where to start if they wish to restrain the risk level of the country’s banking system. As a word of caution, the findings of this paper should be conservatively interpreted as its aim is to investigate Vietnamese banking system only and the data collected specifically serves for this purpose. The implications may not hold in case of developed markets such as U.S, Australia and U.K. This sheds the lights for further studies by expanding the research scope to an international or regional level.