Impact of liquidity transformation to Vietnamese commercial banks adequacy ratio

12
Tạp chí Khoa học & Đào tạo Ngân hàng
Số 229- Tháng 6. 2021
© Học viện Ngân hàng
ISSN 1859 - 011X 
Impact of Liquidity Transformation to Vietnamese 
Commercial Banks Adequacy Ratio
Nguyen, Hong Yen1 - Le, Ngoc Minh Chau2
1 Banking Academy of Vietnam; 2 KIS Vietnam Securities Corporation
Ngày nhận: 08/05/2021 
Ngày nhận bản sửa: 26/05/2021 
Ngày duyệt đăng: 09/06/2021
Abstract: The purpose of this research is to findout the impact of liquidity 
transformation on capital adequacy ratio (CAR) of Vietnamese commercial banks. 
By using Generalized Least Square regression model for 16 Vietnamese banks 
in the period 2012-2020 with dependent variable ‘capital adequacy ratio CAR’, 
independent variable ‘lag liquidity transformation LTG t-1’ and some additional 
control variables (namely: the lag capital adequacy ratio CARt-1, return on equity 
ROE, credit risk CRSK, gross domestic product GDP, inflation rate INFL), this 
study finds that liquidity transformation (LTGt-1) has negative effect on capital 
adequacy ratio (CAR), while the variables lag capital adequacy ratio (CARt-1) and 
credit risk (CRSK) are positively related to CAR, while, ROE, GDP and INFL have 
Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân 
hàng thương mại Việt Nam 
Tóm tắt: Bài viết thực hiện đánh giá tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn 
vốn tối thiểu của các Ngân hàng thương mại Việt Nam. Sử dụng phương pháp hồi quy bình phương 
tối thiểu tổng quát để kiểm định cho 16 ngân hàng ở Việt Nam trong giai đoạn từ năm 2012 - 2020 
với biến độc lập là CAR, biến phụ thuộc là biến trễ của LTGt-1 và một số biến kiểm soát là nhân tố 
bên trong là tỉ lệ vốn tối thiểu năm trước (CARt-1), khả năng sinh lời (ROE) và rủi ro tín dụng (CRSK) 
và các biến số vĩ mô có thể có tác động tới tỉ lệ vốn tối thiểu là: tổng sản phẩm quốc nội (GDP) và tỉ lệ 
lạm phát (INFL). Kết quả của nghiên cứu đã chỉ ra rằng biến LTGt-1 có tác động ngược chiều tới biến 
CAR trong khi đó các biến CARt-1 và CRSK có tác động cùng chiều đến tỉ lệ an toàn vốn tối thiểu CAR. 
Ngược lại, các biến ROE, GDP và INFL không có ý nghĩa kinh tế trong quan hệ với tỉ số CAR.
Từ khóa: Ngân hàng thương mại Việt Nam, Tỉ lệ an toàn vốn tối thiểu, Khả năng chuyển đổi thanh 
khoản, Phương pháp bình phương tối thiểu tổng quát
Nguyễn Hồng Yến
Email: yennh@hvnh.edu.vn
Học viện Ngân hàng
Lê Ngọc Minh Châu
Email: minhchau1812@gmail.com
Công ty cổ phần chứng khoán KIS Việt Nam
NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU
13Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng
insignificant effect on CAR.
Keywords: Capital adequacy ratio, Liquidity transformation, generalized Least 
Square, Vietnam
1. Introduction
The modern theory of financial interme-
diation suggest that banks perform two 
basic functions: risk transitions and li-
quidity transitions (Berger & Bouwman, 
2009). It is evident that to fulfill these two 
transformational roles, maintaining capital 
adequacy is always extremely important 
for banks, hence why much concern is be-
ing expressed in the relationship between 
these two transition fuctions and bank’s 
capital. However, the relationship between 
bank captital and bank risk-taking has 
been mentioned in many studies, there is 
not much attention paid to the liquidity 
transformation - the use of highly liquid 
sources to finance low-liquidity bank 
assets. People often approach bank liquid-
ity from the perspective of liquidity risk 
management, but the empirical studies 
on liquidity transformation are quite rare 
(Horvath, Seidler & Weill 2012). So far, 
the studies on the two issues CAR and 
liquidity are quite detached. The relation-
ship between liquidity transformation 
and CAR is not interested in researches 
(Novokmet & Marinovic, 2016). Alhassan 
(2017) is the only one which studied the 
effect of liquidity convertibility on CAR 
of 20 banks in Ghana. This study con-
cludes that the liquidity of banks in Ghana 
is positively correlated with CAR. 
In Vietnam, the implementation of the 
Basel II Capital Agreement in particular as 
well as compliance with the capital ade-
quacy ratio (CAR) for commercial banks in 
general is extremely urgent. Studies on the 
factors affecting the minimum capital ade-
quacy ratio of commercial banks have been 
conducted by many authors from different 
angles. In which, there are only two studies 
on factors affecting capital adequacy from a 
liquidity perspective, which are the studies 
of Vu Huu Thanh et al. (2016) and Le Tu 
(2018). Both of these studies talk about the 
correlation between liquidity conversion 
and bank capital, not about CAR. These 
two studies conclude that liquidity conver-
sion and bank capital are negatively related. 
Up to date, in Vietnam, there has been no 
research on the impact of liquidity transfor-
mation on the CAR of banks.
With these research gaps, in ord ... e banks for the 
earlier period of time. While the effect 
found by Le Tu (2018) is quite high, our 
finding is more consistent with Vu Huu 
Thanh (2016) of relatively small effect. 
This negative effect confirm the Financial 
Fragility-Crowding Out Hypothesis is ap-
propriate in Vietnam. Accordingly, with 
the underdeveloped capital market in Viet-
nam, both Vietnamese banks and enter-
prises find it difficult to raise fund through 
this market. On the one hand, with only a 
handful of investment chanels, people tend 
to deposit their idle money into bank. And 
banks, of course, have better access to de-
posit facilities while have lower ability to 
access capital markets. On the other hand, 
enterprises have to raise fund by borrow-
ing more money with a longer term at the 
bank, making the risk-weighted assets of 
the bank increase. Both of these trends 
cause CAR (the ratio of bank’s capital 
over risk-weighted assets) to decline.
The Nextremely high and positve coef-
ficient of CRSK (+2.3143) with p-value< 
1% represents a significant effect on CAR. 
This finding is perfectly consistent when 
facing bigger risk banks have to keep 
higher capital adequacy ratios because 
they are required to set aside more capital 
as a buffer against losses. This conclu-
sion is consistent with the research results 
of Mili et al (2014), Masood and Ansari 
(2016) on the banking system at Pakistan 
and Alhassan’s research (2017) on the 
Ghana banks. However, the conclusion 
is different from the results of empirical 
evidence of banks in Jordan (Al-Sabbagh, 
2004) and research of Le Thanh Tam et 
al. (2017) on the determinants of capital 
adequacy ratios of 26 Vietnamese com-
mercial banks in the period of 2009- 2015. 
The variables Gross Domestic Product 
(GDP), Return on Equity (ROE) and Infla-
tion rate (INFL) have statistically non-
significant effect on CAR at all (as shown 
in Table 4).
5. Conclusion and Recommendation 
The authors successfully completed the 
goals of the research, which is empirical 
study impact of liquidity transformation 
on the Capital Adequacy Ratio (CAR) of 
the bank and it showed that the impact is 
inversely proportional in Vietnam. This 
impact clearly showed that liquidity trans-
formation is a signal to show in which di-
rection the CAR is developing in. Because 
of this, it is one of the most important 
statistic for banks to follow in managing 
their business in general and in control-
ling capital adequacy ratio to be specific. 
Based on the results of the research, the 
authors came up with some following 
recommendations: 
5.1. Recommendations for commercial banks
Banks need to build a large database in 
order to accurately identify their liquid-
ity convertibility (represented by liquid-
ity transformation gap) to manage their 
capital adequacy ratio. As explained in the 
research, liquidity transformation gap is 
calculated by determining the actual du-
ration of bank assets and liabilities. This 
determination is in fact based not only on 
the terms of assets and liabilities but also 
on the behavior of the customer which must 
be based on a big database to help the bank 
clearly identify. Based on the big database, 
banks can identify the factors affecting 
customer behavior in early deposit with-
drawal or early loan repayment. There for, 
Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân 
hàng thương mại Việt Nam
22 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
building the database system is a problem 
that banks should put an eye on, especially 
in the Fourth Industrial Revolution.
Reduce the amount of liquidity created. 
The result of the research show that bank’s 
liquidity transformation gap has an inverse 
impact on capital adequacy ratio. There-
fore, the overuse of short-term funds for 
medium and long-term loans will not only 
affect bank liquidity risk as known prior 
but it’ll also reduce the bank’s capital ad-
equacy ratio. Because of this, banks need 
to reduce their liquidity transformation if 
they want to improve their capital ad-
equacy ratio. There are two requirements 
in order to perform this. Firstly, increasing 
long term mobilized funds by creating big 
gap between short-term and long-term de-
posit interest rates to encourage long-term 
deposits. Besides, banks need to increase 
mobilization through issuing valuable 
papers, which shows a more stable term 
compared to deposit. Secondly, bank need 
to use funds with duration corresponding 
to mobilized funds. In fact, the impact 
from liabilities is more difficult, since 
depositing in the bank is solely a cli-
ent’s decision. The impact from the asset 
side is needed. Therefore, in addition to 
extending the term of mobilized capital, 
banks need to have strategies to develop 
short-term credit products or to invest in 
corporate bonds (when the corporate bond 
market has developed).
Improve bank’s credit risk management 
capacity. Overdue debts will on one hand 
lengthen the actual loan maturities more 
than the maturity in loan contact. This will 
unexpectedly increase liquidity trans-
formation ratio and then reduce capital 
adequacy ratio. On the other hand, these 
overdue debts are factors that increase 
the denominator (risk-weighted assets) 
leading to reduce capital adequacy ratio. 
Therefore, banks need to control overdue 
debts.
5.2. Recommendations for management 
agencies
Management agencies need to be aware of 
the importance of the liquidity transforma-
tion of the banking system.
Supervising authorities need to see the 
importance of managing liquidity transfor-
mation of commercial banks. From that, 
they need to establish a reasonable range 
boundary for liquidity transformation for 
commercial banks in order to balance 
between profits and risks of the banks, 
which will increase their capital adequacy 
ratio. For the liquidity transformation gap 
measurement used in research, authors 
suggest the range for liquidity transforma-
tion gap to be at a range from 0.1 to 0.25 
because of the fact that banks in this range 
had ROE at above 10% and CAR at above 
9% during the study period. Therefore, if 
LTG is maintained at this range, the bank 
will not only be safe but also ensure good 
profitability. 
Besides reporting about the status of li-
quidity, supervising authorities need to ask 
commercial banks to report about liquid-
ity transformation gap by day, changes of 
duration of each assets and liabilities and 
not just focusing mainly on managing high 
liquid asset or non-term deposits as cur-
rent rules. As mentioned above, statistics 
about liquidity that are being managed 
by supervising authorities have never 
been the whole chain but rather showed 
only in particular banks, supervising the 
transformed liquidity will help authorities 
understand the liquidity transformation of 
the whole banking system. This will solve 
liquidity problems between banks can 
be solve in a more connective way in the 
NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU
23Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng
future, instead of the disjointed solutions 
being used now.
5.3. Recommendations for further research
Our research employs all the banks in 
one sample, therefore, we can not see the 
detail impact of liquidity transformantion 
to banks capital adequacy ratio in different 
size of banks. The researchers can expand 
the scope of research both in space and 
time and break up research space into spe-
cific banking groups. Because the differ-
ence in liquidity status between large and 
small commercial banks can be noticed, 
the impact of liquidity conversion on bank 
groups may be different or even contra-
dictory according to Berger & Bouwman 
(2009) research on United State commer-
cial banks.
In addition, research on other classifica-
tions of liquidity levels of assets and 
liabilities, and refer to the liquidity being 
created off-balance sheet should be con-
ducted. 
Research on the impact of liquidity trans-
formation on each factor that calculates 
capital adequacy ratio CAR including 
equity and risky assets will help to clarify 
the extent and direction of the impact of li-
quidity transformation to each component 
of CAR, thereby more detailed policies 
can be recommended. ■
References
Ahmad, R., Ariff, M. & Skully, M. (2008), ‘The Determinants of Bank Capital Ratios in a Developing Economy’, Asia-
Pacific Finan Markets, 15. pp. 255–272.
Aktas, R., Acikalin S., Bakin B., Celik G., 2015, ‘The Determinants of Banks’ Capital Adequacy Ratio: Some Evidence 
from South Eastern European Countries’, Journal of Economics and Behavioral Studies, Vol. 7, No. 1, p. 79-88.
Al-Sabbagh, N. (2004). Determinants of Capital Adequacy Ratio in Jordanian Banks. Master thesis. Yarmouk 
University. Irbid, Jordan. 
Alhassan A. S., 2017, ‘Capital adequacy of banks in Ghana: Does liquidity transformation matter?’, Thesis, University 
of Ghana. 
Bateni L., Vakilifard H. & Asghari F., 2014, ‘The Influential Factors on Capital Adequacy Ratio in Iranian Banks’, 
International Journal of Economics and Finance, Vol. 6, No. 11; 2014
Berger, A. N. & Bouwman, C. H., 2009, ‘Bank liquidity creation’, Review of Financial Studies, No. 22(9), pp. 3779-
3837.
BIS, (1999) ‘Basel Committee on Banking Supervision: A new capital adequacy framework’, online, available from: 
https://www.bis.org/publ/bcbs50.pdf (Accessed 12 March 2017), [online]. Available from: https://www.bis.org/
publ/bcbs50.pdf (Accessed 12 March 2017).
Bhattacharya, S., & Thakor, A. V. (1993). Contemporary Banking Theory. Journal of Financial Intermediation, 3(1), 
2-50. 
Coval & Thakor, 2005, Financial intermediation as a beliefs-bridge between optimists and pessimists, Journal of 
Financial Economics 75(3):535-569
Deep, A., & Schaefer, G. (2004), Are Banks Liquidity Transformers? Harvard University, John F. Kennedy School of 
Government.
Diamond D. W., 2007, ‘Banks and liquidity creation: a simple exposition of the Diamond-Dybvig model’, FRB 
Richmond Economic Quarterly, Vol.93(2), pp. 189-200.
FiinPro, 
Horvath, R., Seidler, J., & Weill, L. (2012). Bank Capital and Liquidity Creation. Social Science Research Network. 
Le Thanh Tam and Nguyen Dieu Linh, 2017, “Cac yeu to quyet dinh toi ty le an toan von cua ngan hang: bang chung 
thuc nghiem tu Viet Nam” (Factors affect bank’s capital adequacy ratio: an empirical study in Vietnam), NEU 
publisher, Hanoi, pp. 84-107.
Le Tu (2018), The interrelationship between liquidity creation and bank capital in Vietnamese banking, Managerial 
Finance, Vol. 45 Issue: 2, pp.331-347
Masood, U., & Ansari, S. (2016), ‘Determinants of Capital Adequacy Ratio - A Perspective from Pakistani Banking 
Sector’, International Journal of Economics, Commerce and Management, 4(17), 247-273.
Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân 
hàng thương mại Việt Nam
24 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
APPENDICES
Mili, M., Sahut, J. M., & Trimeche, H. (2014), Determinants of the Capital Adequacy Ratio of a Foreign Bank’s 
Subsidiaries: The Role of the Interbank Market and Regulation of Multinational Banks (No. 2014-366). 
Novokmet & Marinović, 2016, Solvency and Liquidity Level Trade-off: Does it Exist in Croatian Banking Sector?, 
Scientific Annals of Economics and Business 63(3):429-440
Repullo, R. (2004). Capital Requirements, Market Power, and Risk-taking in Banking. Journal of Financial 
Intermediation, 13(2), 156-182. 
Than Thi Thu Thuy and Nguyen Kim Chi, 2015, ‘Nghien cuu cac yeu to anh huong den he so an toan von tai cac NHTM 
CP Viet Nam’ (Studying factors affect capital adequacy ratio of Vietnamese joint stock commercial banks), 
Banking Review, No. 11 June, 2015.
The State Bank of Vietnam (2014). Circular No. 36/2014/TT-NHNN dated November 20, 2014 on stipulating minimum 
safety limits & ratios for transactions performed by credit institutions & branches of foreign banks [online]. 
Available from:  
(Accessed 1 March 2017).
The World Bank, Data/Vietnam, https://data.worldbank.org/country/vietnam?view=chart
Tran, V. T., Lin, C. T., & Nguyen, H. (2016), ‘Liquidity Creation, Regulatory Capital, and Bank Profitability’, 
International Review of Financial Analysis, 48, pp. 98-109.
Von Thadden, E. L. (2004), ‘Bank Capital Adequacy Regulation under the New Basel Accord’, Journal of Financial 
Intermediation, 13(2), pp. 90-95.
Vu Hung Phuong and Dang Ngoc Duc (2020), Determinants influencing capital adequacy ratio of Vietnamese 
commercial banks, Accounting, 6 (2020), p. 871–878 
Vu Huu Thanh et. al, 2016, ‘Von ngan hang, su tao thanh khoan va hieu qua cua ngan hang’ (Bank capital, liquidity 
creation and bank efficiency), Science Magazine, Open University of Ho Chi Minh City, No. 4(49)2016.
Wooldridge, J. (2002), Econometric Analysis of Cross Section and Panel Data, MIT Press.
Yuanjuan, L. &Shishun, X., 2012, ‘Effectiveness of China’s Commercial Banks’ Capital Adequacy Ratio Regulation, A 
Case Study of The Listed Banks’, Inter disciplinary Journal of Contemporary research in busines, 4 (1) p. ijcrb.
webs.com.
Appendix 1. List of Sample Banks 
Acronyms Name of Banks
1 ACB Asia Commercial Joint Stock Bank 
2 BID JSC Bank for Investment and Development of Vietnam 
3 CTG Vietnam Joint Stock Commercial Bank for Industry and Trade 
4 EIB Vietnam Joint Stock Commercial Export Import Bank 
5 HDB Ho Chi Minh City Housing Development Bank 
6 KLB Kien Long Commercial Joint Stock Bank 
7 MBB Military Commercial Joint Stock Bank 
8 MSB Vietnam Maritime Joint – Stock Commercial Bank 
9 NCB National Citizen Commercial Joint Stock Bank 
10 SHB Saigon – Hanoi Commercial Joint Stock Bank 
11 STB Sai Gon Thuong Tin Commercial Joint Stock Bank 
12 TCB Viet Nam Technological and Commercial Joint Stock Bank 
13 TPB Tien Phong Commercial Joint Stock Bank 
14 VCB JSC Bank for Foreign Trade of Vietnam 
15 VIB Vietnam International and Commercial Joint Stock Bank 
16 VPB Vietnam Prosperity Joint Stock Commercial Bank 
Source: Summarized by the authors
NGUYỄN HỒNG YẾN - LÊ NGỌC MINH CHÂU
25Số 229- Tháng 6. 2021- Tạp chí Khoa học & Đào tạo Ngân hàng
Appendix 2. Reclassified Assets and Liabilities Liquidity Catagories
Tác động của khả năng chuyển đổi thanh khoản đến tỉ lệ an toàn vốn tối thiểu của các ngân 
hàng thương mại Việt Nam
26 Tạp chí Khoa học & Đào tạo Ngân hàng- Số 229- Tháng 6. 2021
Source: Reclassified by the authors
Appendix 3: The first correlation matrix between variables
 Source: Authors’ canculations from Stata software
Appendix 4: The second correlation matrix between variables 
Source: Authors’ canculations from Stata software