Impacts of Monetary Policy on Stability of Commercial Banks – Evidence from Vietnam

Abstract

Before 2009, most central banks conducted their monetary policy with the ultimate goals of promoting price stability, economic growth and full employment. However, the 2009 financial crisis demonstrated that these goals are not enough to maintain a stable financial arena. So, aside from those objectives, the objective of financial stability is also of interest to central banks when implementing monetary policy. In this study, the authors explore the influence of monetary policy on the stability of commercial banks in Vietnam – an emerging economy. The study uses the dataset of the Vietnamese commercial banks from 2008 to 2019, applying SGMM estimations and checking their robustness with a Bayesian approach. The results show that, in recent years, the SBV has effectively implemented monetary policy to ensure banks’ stability in Vietnam. In particular, money supply M2 has positively impacted the stability of commercial banks. Also, the results imply that the ratio of loan to total assets, the ratio of cost operating to income operating, as well as CPI, correlate negatively with bank stability. The study did not find any impact of bank size or GDP on bank stability during the research period. Based on these results, the SBV should manage an optimal level of money supply M2 to guarantee efficient economic operations in general and maintain bank stability in particular, and should avoid high inflation.

The Impact of Macroeconomic Factors on Banks’ Liquidity from 2008 to 2020

“…Price stability in the cost of liquidity can bring problems, and every bank must reach a compromise between them. If a bank does not take care of price stability, it may not survive for a more extended period, while on the other hand, if it does not take care of liquidity, it may face bankruptcy (Audo, 2014;Mazreku, Morina, Misiri, Spiteri, & Grima, 2019;Nguyen & Nguyen, 2021;Rupeika-Apoga, Zaidi, Thalassinos, & Thalassinos, 2018;Shamsub & Haque, 2021;Trenca, Petria, & Corovei, 2015). For these reasons, price stability should be given due consideration as it may affect a bank's liquidity.…”