Monetary Policy, Bank Competitiveness and Bank Risk-taking: Empirical Evidence from Vietnam

Abstract

This study assesses the impact(s) of monetary policy and further influence of competitiveness on bank risk-taking of the Vietnamese commercial banks over the period of 2007–2016, an unstable period of the domestic monetary policy. The monetary policy is captured by a set of different variables including money supply, refinancing interest rate and treasury bill interest rate. Using the GMM methodology, the study finds that the monetary policy of Vietnam has a significant impact on bank risk-taking level, as measured by Z-score index. The empirical findings also indicate that bank risk-taking increases in the context of a loose monetary policy. In addition, the competitiveness of banks, presented by the Lerner index, is found as a determinant of bank risk-taking levels. By using interacting variables, the findings indicate that the impact of the competitiveness of banks outweighs that of monetary policy on bank risk-taking behaviour. It implies that the banks with high market power demonstrate less risk-taking behaviour even in a loose monetary policy environment. Besides that, liquidity, credit level and cost inefficiency could increase risk-taking behaviour of banks while bank size poses restrictions on bank risk-taking.