ISSN 2588-1299 VJAS 2024; 7(1): 2076-2084

Vietnam Journal [Link]

of Agricultural
Sciences
Determinants of Liquidity Risk in Vietnamese
Commercial Banks
Nguyen Thi Huong* & Dang Thi Hai Yen

Faculty of Accounting and Business Management, Vietnam National University of

Agriculture, Hanoi 131000, Vietnam

Abstract
Liquidity risk, which tends to compound other risks such as credit
and market risks, has become one of the principal risks in banks.
Thus, this study examined the determinants of liquidity risk measured
by the loan deposit ratio (LDR). The sample included 30 commercial
banks in Vietnam based on secondary data coverage from 2017-2021.
Descriptive statistics were used to determine the general situation of the
banks' assets, liabilities, and business performance. The random effects
model (REM) was chosen to determine factors affecting liquidity risk.
The results show the huge gap in the business performance of the four
state-owned banks and the rest of the joint-stock commercial banks,
and the state-owned banks always accounted for over 50% of the total
credit, assets, and deposits of the whole banking system. The average
banks’ credit and profit growth rates were around 17% and 30%,
respectively, and the bad debt ratio was about 2%. Increasing a
bank’s credit growth rate and profitability would push up its liquidity
risk. On the other hand, holding several liquid securities that banks
could sell immediately to meet solvency requirements and
maintaining a high capital adequacy ratio (CAR) would reduce their
liquidity risk. These findings are valuable to the banks in
understanding how to minimize liquidity risk, such as controlling the
credit growth rate and CAR, setting appropriate profit targets, and
investing in liquid securities. Additionally, by conducting monetary
policies, the State Bank should regulate market liquidity and bank
liquidity for the safe operation of the financial system.

Keywords
Liquidity risk, credit, CAR, commercial banks, LDR

Introduction
Commercial banks are financial institutions that provide services
such as loans, certificates of deposits, savings bank accounts, and
Received: May 24, 2023 bank overdrafts to their customers in which they use the deposits as
Accepted: March 15, 2024 capital for providing loans. As can be seen, the amount of deposits
Correspondence to
can change and sometimes be unpredictable; consequently, any
[Link]@[Link] change that affects the stability of deposits can directly impact a
2076 Vietnam Journal of Agricultural Sciences
 Nguyen Thi Huong & Dang Thi Hai Yen (2024)

bank’s liquidity, which is the ability to pay bills Thi Tuyet Nga (2019), Phan Thi My Hanh &
and meet financial obligations when they come Tong Lam Vy (2019), and Nguyen Thi Bich
due. Liquidity is principal to banks because it Thuan & Pham Thi Anh Tuyet (2021), and most
ensures expected and unexpected fluctuations in recently by Nguyen (2022). In these studies, the
their financial position while providing funds for authors measured liquidity risk by the liquid
their growth. A bank might lose liquidity if it assets to total assets ratio, liquid assets to
experiences sudden unexpected cash outflows by deposits and short-term financing ratio, debt to
way of large deposit withdrawals, large credit total assets ratio, and loan to deposit ratio; and
disbursements, unexpected market movements, identified the factors affecting liquidity risk by
or crystallization of contingent obligations. Other the capital adequacy ratio (CAR), bank size, bad
causes may be because of some outside event debt ratio, credit growth rate, profitability, equity
causing counterparties to avoid trading with or ratio, foreign owner rate, inflation rate, gross
lending to the bank. A bank is also in a weak domestic product (GDP), unemployment rate,
liquidity position if the markets on which it and interbank market interest rate. However, the
depends are subject to loss of liquidity. Liquidity data used in these studies were from the past and
risk occurs when a bank is unable to meet its did not cover the period of the COVID-19
financial obligations when they come due or is pandemic when the economy and financial
unable to do so at a reasonable cost. Liquidity system were seriously affected.
risk causes banks to lose investment opportunities Therefore, this study was conducted to
and affects their business performance, and also determine the factors affecting the liquidity risk
tends to compound other risks, such as credit risk of commercial banks in Vietnam during the time
and market risk. According to Zheng et al. (2016) frame of the COVID-19 pandemic. The research
and Fredrick et al. (2018), there are positive and results will provide the scientific basis for
significant relationships between liquidity risk and commercial banks and the State Bank to propose
bank failure. appropriate policies to improve the efficiency
Previous studies have focused on the and safety of the banking system.
characteristics of banks and analyzed the factors
affecting a bank's liquidity risk. For example,
Methodology
Nikolaou (2009), Bonfim & Kim (2012), and
Alzoubi (2017) showed that more profitable Data collection
banks tend to show higher liquidity risk. Majid Data were collected for the research period
(2003) discussed the importance of liquidity risk of 2017-2021, which included the time frame
management as a key tool in protecting banks leading up to and including the COVID-19
from failure and ensuring the stability of the pandemic. The data used in the study were
financial system. The study also highlighted the secondary data from annual audited financial
importance of regulatory coordination between statements published on commercial banks’
central banks and financial markets. Chen et al. official websites, and regulations and guiding
(2010) showed that liquidity risk depends on circulars of the State Bank on the capital
current assets and external financing, and adequacy ratio (CAR) and liquidity risk
liquidity risk can reduce bank profitability. Iqbal management in the banking system. Thirty
(2012) pointed out that bad debts have a negative commercial banks that were operating normally
relationship with liquidity risk, while the capital during the time frame were selected for the study.
adequacy ratio, profitability ratio on assets,
return on equity, and size of the bank have a Data analysis
positive relationship with liquidity risk. In Descriptive statistics were used to determine
Vietnam, the study of the liquidity risk of banks the general situation of the banks' assets,
was first conducted by Truong Quang Thong liabilities, and business performance. The data
(2013) and then by Vu Thi Hong (2015), Nguyen collected from the 30 commercial banks in the

[Link] 2077
Determinants of liquidity risk in Vietnamese commercial banks

period from 2017 to 2021 were panel data in NHNN, which stipulates the limits and ratios to
which the behaviors of the entities (i) were ensure safety in the operations of banks and
observed across time (t): (𝑋𝑖𝑡 , 𝑌𝑖𝑡 ), i=1,...,n; foreign bank branches. Accordingly:
t=1,...T (Stock & Watson, 2007). To analyze LDR ratio = Loans to customers / Total
panel data, one of the following three models is mobilized capital (including customer deposits +
typically used: pooled ordinary least squares valuable papers - Deposits - Specialized capital
(OLS), fixed effects model (FEM), and random deposits)
effects model (REM). Typically, the higher the LDR, the greater
Pooled OLS is used for panel data to the bank's profitability, but the trade-off is also a
estimate the relationship between a dependent higher liquidity risk because credit is considered
variable and one or more independent variables a minor liquid asset among the bank's profitable
and assumes that such a relationship is the same assets but is the main profitable asset.
for all individuals or entities in the panel. The There are many factors that can affect the
regression model is: 𝑌𝑖𝑡 = α + 𝛽𝑋𝑖𝑡 + μit; liquidity risk of commercial banks. These factors
where, 𝑌𝑖𝑡 is the dependent variable of bank i in affecting bank liquidity have been identified in
year t, 𝑋𝑖𝑡 are the explanatory variables, β are the previous studies by Bonfim & Kim (2012),
coefficients for 𝑋𝑖𝑡 , and μit is the error term. Cucinelli (2013), Fatimah (2016), and Alzoubi
However, panel data deals with omitted (2017), and domestic studies by Truong Quang
variable bias due to heterogeneity in the data. It Thong (2013), Vu Thi Hong (2015), Nguyen Thi
does this by controlling for variables that we Tuyet Nga (2019), Phan Thi My Hanh & Tong
cannot observe, are not available, and/or cannot Lam Vy (2019), Nguyen Thi Bich Thuan &
be measured but are correlated with the Pham Thi Anh Tuyet (2021), and Nguyen (2022)
dependent variables. Thus, it’s reasonable to use are given in Table 1.
the FEM or REM rather than pooled OLS. FEM According to the above studies, several factors
assumes a correlation between the entity’s error may impact the liquidity risk of commercial banks
term and predictor variables, and an entity’s in Vietnam, including COVID-19, the bank’s
fixed effects cannot be correlated with another credit growth rate, return on assets (ROA) (%),
entity’s. Unlike FEM, REM assumes that the CAR, bad debt ratio (%), profit after tax, the ratio
variation across entities is random and of equity to total assets (%), the ratio of liquid
uncorrelated with the predictor or independent securities to total assets, and the ratio of cash and
variables, which allows for time-invariant cash equivalents to total assets.
variables to play a role as explanatory variables.
To determine the appropriate model for this Results and Discussion
research, three tests were conducted. First, to
choose between pooled OLS or FEM, an F-Test General business performances of the
was conducted. If Prob < 0.05, then FEM is more commercial banks
appropriate than OLS. Second, to choose During the COVID-19 pandemic, Vietnam
between pooled OLS or REM, the Breusch- faced significant slow economic growth, in which
Pagan test was conducted. If Prob < 0.05, then the GDP growth rates decreased from 7.4% in 2019
REM is more appropriate than pooled OLS. to 2.9% in 2020 and to 2.6% in 2021 (World Bank,
Finally, to choose between pooled OLS or FEM, 2022). Some industries were frozen, such as
the Hausman test was conducted. If Prob < 0.05, aviation and tourism, but others had great
then FEM is more appropriate than pooled OLS. development opportunities, such as e-commerce.
As such, the impact of the pandemic on bank
Liquidity risk performance, which is linked with all industries in
This study chose the loan to deposit ratio the economy, was more unpredictable. Bank
(LDR) to measure liquidity risk based on performance needed to be assessed based on some
previous research by Bonfim & Kim (2012), basic indicators, such as assets, deposits, credit,
Fredrick et al. (2018), and Circular 22/2019/TT- profit, bad debt, and CAR.

2078 Vietnam Journal of Agricultural Sciences

 Nguyen Thi Huong & Dang Thi Hai Yen (2024)

Table 1. Summary of previous studies on factors affecting bank liquidity

Nguyen
Phan
Thi Bich Nguyen
Factors Thi My Truong
Bonfim Thuan & Thi Vu Thi
affecting Alzoubi Fatimah Cucinelli Nguyen Hanh & Quang
& Kim Pham Thi Tuyet Hong
bank (2017) (2016) (2013) (2022) Tong Thong
(2012) Anh Nga (2015)
liquidity Lam Vy (2013)
Tuyet (2019)
(2019
(2021)
Cash ratio -
Security
- - -
ratio
Bank size +/- + - - - - + - +
ROA/ROE + + + - - - +
Equity ratio - +
Bad debt + -
Cost to
+ +/-
income
Capital - +/-
CAR -
GDP - + - +
Inflation + + +
Financial
+
crisis
Credit
+ + + +
growth rate

Note: (+): positive impact; (-): Negative impact; (+/-): Maybe positive/ negative impact. 0: No significant impact.

As of September 30, 2022, there were 35 commercial banks reached VND 12,869 trillion,
commercial banks in Vietnam, of which 30 of which, the total assets of the four state-owned
domestic banks were operating normally. Of the banks reached VND 6.4 trillion, accounting for
five banks not operating normally, the State Bank nearly 50% of the total assets of the 30 banks.
took special control over two of them, while it The four state-owned banks had a significant
owned three commercial banks for restructuring impact on the financial system and the economy
purposes. Among the 30 domestic banks, four compared to the other banks. At the end of 2021,
were State-owned commercial banks, which BIDV was the largest bank, with total assets of
included one State-owned commercial bank, VND 1,761 trillion; meanwhile, the smallest
namely Agribank, and three joint-stock bank was SGB, with total assets of VND 24.6
commercial banks in which state-owned trillion, only 1.39% of the largest bank.
accounts accounted for more than 70%, namely
BIDV, Vietinbank, and Vietcombank. There Deposits were more affected by the
were significant gaps in assets, customer pandemic in 2020. Table 2 shows that the number
deposits, and credit between State-owned banks of deposits in 2020 sharply decreased compared
and other joint stock banks. On average, the to the other years in the study. The reason for this
commercial banks' assets grew at a rate of observation could be due to the interest rate
approximately 12%, customer deposits grew at decreasing in 2020, leading customers to invest
22%, and the average credit growth rate was in the securities market and real estate market to
16.63%. The general information of the banks is find higher profitability instead of depositing
shown in Table 2. their money in banks.
For instance, Figure 1 shows the banks Credit growth is significant for bank
assets in 2021, the total assets of the 30 development. Prior to the pandemic, the credit

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Determinants of liquidity risk in Vietnamese commercial banks

Table 2. General information on banks

Unit: Billion VND

Year 2017 2018 2019 2020 2021

Assets
Total assets of 30 banks 8,068,163 8,889,602 10,073,361 11,192,741 12,869,459
Four state-owned banks 4,485,542 4,833,947 5,405,863 5,752,479 6,403,888
Average 268,938 296,320 335,778 373,091 428,981

Max 1,202,283 1,313,037 1,489,957 1,568,126 1,761,695

Min 21,319 20,373 22,812 23,942 24,608

Deposits
Total deposits of 30 banks 5,766,238 6,449,522 7,368,363 4,696,642 9,218,226
Average 192,207 214,984, 245,612 173,949 307,274
Max 1,007,694 1,103,606 1,269,373 990,331 1,542,504
Min 14,849 14,678 22,812 18,223 18,105
Credit
Total credit of 30 banks 5,199,233 5,963,374 6,863,076 7,718,278 8,787,785
Average 173,307 198,845 228,769 257,275 292,926
Max 876,237 1,004,571 1,121,900 1,214,295 1,354,632
Min 14,105 13,671 14,556 15,447 16,502

Bank's Assets in 2021

2,000,000,000
1,800,000,000
1,600,000,000
1,400,000,000
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
0
EIB

TCB

VCB
CTG
KienlongBank

OCB

MSB

HDB

BID
SGB
PGBank

VietCapital

BacABank

NamABank

SEABank
BaovietBank

VietABank

MBB
PVB

LPB

STB
TPB

SHB

VPB
NCB

VietBank

ABB

VIB

ACB

Agribank

Figure 1. Assets of commercial banks in 2021

growth rate was at an average of 16.63% per suspended operations, or closed, and laborers and
year, with NamABank having the highest rate at households lost jobs and income, which led to the
53% in 2017. However, in 2020-2021, anti- decrease in the credit growth rate in such years.
epidemic policies such as social distancing and Besides credit growth, banks must pay
lockdowns affected not only the economy but attention to controlling bad debt because it has
also the psychology of enterprises and negative consequences such as reducing capital,
households. Many enterprises suffered losses, losing profitable opportunities, and pushing the

2080 Vietnam Journal of Agricultural Sciences

 Nguyen Thi Huong & Dang Thi Hai Yen (2024)

bank into a bankrupt situation. From 2017-2021, macro factors like inflation, the GDP, and
the bad debt rate was controlled at 2%, and only exchange rates. Based on previous research
STB had a high bad debt rate of 13.23% in 2018. outlined in the methods section, the chosen
The profit of banks in 2021 can be seen in factors for analysis in the regression model are
Figure 2. The profits of banks increased sharply presented in Table 3. The correlation matrix test
with the average profits increasing by 30% per showed that there was no multicollinearity
year. In 2021, some banks had huge profits of among variables. Table 4 gives the results of the
over VND 10 trillion, namely Vietcombank- pooled OLS, fixed effects model, and random
VCB (VND 21 trillion), BIDV- BID (VND 10 effects model regression analyses.
trillion), Vietinbank- CTG (VND 14 trillion),
According to the results of the F-test,
Techcombank- TCB (VND 18 trillion), Agribank
(VND 12 trillion), and VPBank- VPB (VND 11 Breusch-Pagan test, and Hausman test, the REM
trillion). The bad debt rate was controlled at an was sufficient to explain the factors affecting the
average of 2%. liquidity risk of commercial banks in Vietnam.
To protect depositors as well as the safety of The bad debt rate has a positive and
the financial system, the State Bank is significant impact on liquidity risk. When
responsible for monitoring the CAR, which is customers fail to pay their debts, the bank can fail
essential for controlling the financial position to collect debts in time to pay for large deposit
and reliability of a bank. The average CAR was withdrawals and financial obligations with due
at 10.94%, higher than the required CAR of 8%, dates, consequently increasing the bank’s
and SGB had the highest CAR in the system with liquidity risk. Alzoubi (2017) also indicated that
a value of 17.34% in 2021. bad debt not only eroded capital and reduced
profits, but also reduced the financial capacity of
Factors affecting the liquidity risk of banks. In contrast, Vu Thi Hong (2015) showed
commercial banks in Vietnam that if a bank's bad debt increased, the bank's
Numerous variables can impact the liquidity liquidity also increased and the liquidity risk
risk of a commercial bank, including both decreased. She explained that if bad debt
internal factors such as business performance, increased, banks tended to raise more liquid
investments, reserves, and bad debt, as well as assets to meet short-term payment demands.

Bank's Profit in 2021

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0
BacABank

LPB

TPB
SEABank

STB

SHB
SGB

MBB
PGBank

NamABank

VIB

BID
NCB

VietCapital

VietBank

KienlongBank
EIB

VPB

TCB
ABB

OCB

ACB

CTG

VCB
BaovietBank

VietABank

MSB

HDB

Agribank

Figure 2. Profits of commercial banks in 2021

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Determinants of liquidity risk in Vietnamese commercial banks

Table 3. Description of variables

Variables Description Variable type Unit Average Min Max

Dependent variable
LDR Liquidity ratio continuous % 0.92 0.56 1.47
Independent variables
Dummy;
Covid Year of Covid-19 pandemic 0: no covid 0 1
1: have covid
Loan_rate Credit growth rate continuous % 16.63 -11.02 53.68
ROA Profitability of assets continuous % 0.89 0.00 3.23
CAR Capital adequacy ratio continuous % 10.94 8.39 17.34
Bad_rate Bad credit rate continuous % 2.10 0.03 13.23
Profit Profit after tax continuous trillion VND 3,489.72 90.71 21,939.04
Equity_ratio Ratio of equity/ total assets continuous (%) 0.08 0.04 0.17
Sec_ratio Ratio of liquid securities/ total assets continuous (%) 0.13 0.00 0.33
Cash_ratio Ratio of cash/ total assets continuous (%) 0.01 0.02 0.07

Table 4. Results of the pooled OLS, FEM, and REM analyses

Variables Pooled OLS FEM REM

Covid -0.001 -0.012 -0.008

Loan_rate 0.003*** 0.002*** 0.003***
ROA 0.109*** 0.096*** 0.100***
CAR 0.000 -0.001** -0.001**
Bad_rate 0.003 1.730*** 1.308**
Profit 0.000 0.000 0.000
Equity_ratio 0.037 -0.004 -0.003
Sec_ratio -0.300** -0.640** -0.462**
Cash_ratio -1.680 -1.180 -1.404
_cons 0.797 0.770 0.778

Note: *** and ** denote significance at the 1% and 5% confidence levels, respectively.

Banks tended to focus on handling bad debt Quang Thong (2013), Alzoubi (2017), Nguyen
through debt recovery, mortgage assets, and Thi Bich Thuan & Pham Thi Anh Tuyet (2021),
setting up risk provisions rather than increasing and Nguyen (2022).
liquid assets. The ratio of securities has a strong and
Credit is the main priority in banks and most negative impact on liquidity risk, meaning that
of a bank's profits come from lending out money holding many liquid securities reduces liquidity
to their clients. The main source of credit comes risk. Securities include stocks, bonds, treasury
from savings deposits that can change and lead to bills, and valuable papers that could be converted
uncertainty. By extending credit, banks risk into cash quickly without losing a substantial
having uncontrollable credit quality and massive amount of their value. They can be bought and
deposit withdrawals. Thus, the bank’s liquidity sold instantly to meet financial obligations or
risk would be pushed up. These results are used as pledged assets to borrow additional
consistent with previous studies by Truong capital from the State bank. This was reported by

2082 Vietnam Journal of Agricultural Sciences

 Nguyen Thi Huong & Dang Thi Hai Yen (2024)

Alzoubi (2017), Phan Thi My Hanh & Tong Lam Commercial banks recommendations
Vy (2019), and Nguyen Thi Bich Thuan & Pham Managing bad debt and increasing the
Thi Anh Tuyet (2021). quality of credit is essential to ensure the safety
Additionally, the CAR reveals a negative of banking operations. Banks must coordinate
impact on liquidity risk, meaning that an with borrowers to restructure debt; extend the
increase in a bank’s CAR is associated with a debt repayment time; strengthen provisioning
decrease in its liquidity risk. The CAR is one of and debt recovery according to regulations;
the important criteria when assessing a bank’s compile regulations on lending and credit limits;
operations and risk management. The CAR and compile and improve credit appraisal quality
reflects the bank's ability to meet term liabilities not only at the loan appraisal and approval stages,
and other risks such as its liquidity risk, credit but also in the credit granting process.
risk, market risk, and operational risk. Securities investment and trading activities
Therefore, in many countries, the Central Bank play an important role for banks to support their
always determines and requires banks to liquidity position, diversify their investment
maintain a minimum CAR. In Vietnam, the portfolios, and improve their profits. Thus, is
CAR is calculated according to the Basel II necessary for banks to improve their efficiency
international standards and is set at a minimum of security management to achieve their set
of 8%. Fatimah (2016) and the conclusions of objectives.
the Reserve Bank of New Zealand (2007) also The CAR ensures efficiency and stability by
pointed out that the higher CAR a bank had, the reducing the risk of bank insolvency. In general,
smaller liquidity risk could be observed. a bank with a high CAR is considered safer and
Bank profitability (ROA) is one of the more capable of meeting its financial obligations.
important indicators to evaluate a bank’s Thus, calculating and maintaining sufficient
operations. Pursuing profit also means facing CAR is mandatory and essential to banks.
different kinds of risks. Many previous studies There is a tradeoff between risk and return,
have found that increasing profitability can and to pursue profits, the bank must maintain a
reduce liquidity risk (Phan Thi My Hanh & Tong balance between the required liquidity and the
Lam Vy, 2019; Nguyen Thi Tuyet Nga, 2019; desire for profitability. This means banks should
Nguyen, 2022). However, this study found the diversify their investment portfolio to earn
opposite result in which higher profitability led profits and at the same time hold onto liquid
to higher liquidity risk. This can be explained in assets to ensure solvency.
that as a bank's profitable asset portfolio
expanded, the more liquid but low-return assets Policy implications
shrank, and thus more profits were earned but the
liquidity risk increased. This result is also The State Bank plays a crucial role in
consistent with those of Demirgüç-Kunt & ensuring economic and financial stability. Along
Huizinga (2010), Bonfim & Kim (2012), Vu Thi with supporting liquidity in critical financial
Hong (2015), and Alzoubi (2017). Research by markets and maintaining credit flow, the State
the European Central Bank also suggests that in Bank must control the credit growth rate in each
banks, the higher the profitability, the greater the period and ensure the banks’ CAR following
liquidity risk (Nikolaou, 2009). regulations. Also, the State Bank must closely
monitor bank operations to ensure the entire
financial system is operating efficiently.
Recommendations and Policy
Implications
Conclusions
All financial decisions of commercial banks
must balance between risks and benefits. To In general, from 2017 to 2021, banks had an
avoid bank liquidity stress, some average assets growth rate of about 12%, the
recommendations and policy implications can be customer deposit growth rate was 22%, the credit
made based on the results of this research. growth rate was an average of 16.63% per year,
[Link] 2083
Determinants of liquidity risk in Vietnamese commercial banks

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2084 Vietnam Journal of Agricultural Sciences