Impact of uncertainty and other factors on bank liquidity risk in Vietnam

Abstract

This paper examines the impact of uncertainty on bank funding liquidity risk (FLR). Based on 31 Vietnamese commercial banks from 2007 to 2019 through two step SGMM estimator and the least squares dummy variable corrected (LSDVC) technique, the study shows evidence that micro uncertainty in the banking sector which is captured by the cross-sectional dispersion of shocks to assets (UncAsset), short-term funding (UncFund) and bank profitability (UncProfit) leads to higher funding liquidity risk, as proxied by lower deposit ratios. Additional analyses reveal that this nexus widely depends on bank heteroge- neity. More precisely, various bank-specific levels that improve banks’ financial strength (i.e., an increase in bank return, loan quality, capitalization, liquid assets, and bank size) tend to mitigate the adverse impact of uncertainty on bank funding liquidity risk. In addition, macro variables are included in the model such as the refinancing rate of the State Bank of Vietnam. Economic cycles reflecting annual GDP changes also contribute to clarify the impact of banking uncertainty on funding liquidity risk. Finally, the study's findings not only demonstrate the robustness for different regression, but also remain unchanged when different bank-level variables are combined used to assess the impact of uncertainty on funding liquidity risk.