The impact of income diversification on liquidity creation and financial performance of Vietnamese Commercial Banks

Loan Quynh Thi Nguyen,Cuong Van Hoang,Tuan Dung Hoang,Manh Dung Tran

doi:10.5267/j.ac.2020.4.004

Abstract

The impact of income diversification on liquidity creation and financial performance of Vietnamese Commercial Banks

Highlights

The modern theory of financial intermediation suggests that a critical function of banks in the economy is to create liquidity and thereby provide funding for investment as well as generate other crucial financial services to customers
Our results are in line with the findings of Hou et al (2018) that diversification has a negative influence on bank liquidity creation in emerging countries
Perhaps the portfolio diversification is more applicable to the case of Vietnamese banks and as such when banks diversify into non-interest revenue, their revenue risk declines (Williams, 2016)

Summary

Introduction

The modern theory of financial intermediation suggests that a critical function of banks in the economy is to create liquidity and thereby provide funding for investment as well as generate other crucial financial services to customers. Banks may create liquidity off-balance sheet by providing loan commitments and similar claims to liquid funds (Berger & Bouwman, 2009). The extant literature has dedicated significant attention about bank diversification Many of these studies (e.g. Stiroh, 2004; Berger et al, 2010; Li & Zhang, 2013; Meslier et al, 2014) have focused on investigating how bank income diversification affect bank risk-taking, bank business model and bank performance and find somehow mixed evidence. On the one hand, bank revenue diversification is found to have a positive impact on bank risk by reducing idiosyncratic risk and total risk. It can increase the risk-return frontier by creating more investment opportunities. On the other hand, have showed that diversification can negatively affect the performance of banks by dispersing managerial resources and increasing earnings volatility (e.g. Berger et al, 1999; Milbourn et al, 1999; Bliss & Rosen, 2001)

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Conclusion