Abstract
This study employs generalized method of moments (GMM) for dynamic panel data models to deal with the nature of banking behaviour, aiming at investigating the impact of bank equity on the risk and return of Vietnamese commercial banks during the period of 2006–2017. The study finds that increasing bank equity is not always the best strategy to be accompanied by absolute benefits, increasing returns and reducing risks for banks but is a trade-off instead. More precisely, banks with larger capital buffers tend to take less risk but are less profitable. In addition, the study also finds a non-linear relationship revealing that bank risk mitigates the effect of bank equity on profitability. Most estimations show strong robustness checked by some alternative techniques. Based on the findings, the study provides some important policy implications to improve the performance of the banking system in Vietnam as well as in other emerging countries.
Highlights
Regulatory authorities establish capital safety limits with the purpose of reducing bank riskiness, especially preventing bank collapses after crises (Demirgüç-Kunt et al 2013)
We find that the regression coefficients of interaction terms are significant positive, at the level of 1%, suggesting the ability of bank risk to influence the impact of bank equity on return
The aim of this study is to investigate the impact of bank equity on risks and returns of Vietnamese banks during the period of 2006–2017
Summary
Regulatory authorities establish capital safety limits with the purpose of reducing bank riskiness, especially preventing bank collapses after crises (Demirgüç-Kunt et al 2013). Regulations to enhance capital strength create heterogeneous effects for the banks’ benefits (Basher et al 2017). A high capital ratio tends to be costly, implying a decline in profitability but at the same time it could reduce bank risk, as many arguments suggest (Meriläinen 2016). As profit-driven businesses, banks could determine an optimal capital ratio to maximize their value. Banks tend to finance with equity passively without considering the role of the capital buffer (Sorokina et al 2017). This is especially true for a developing country like Vietnam, where banks are complying with capital regulations in a coping, unintended manner
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
