Non-interest Income, Credit Risk and Bank Stability: Evidence from Vietnam

Abstract

This study examines the impact of non-interest income on bank riskiness captured by two dimensions of credit risk and bank stability. Based on a panel of Vietnamese banks during the period 2007-2017 and a dynamic approach estimated by the generalised method of moments (GMM), we find that: (1) banks more involved in non-interest income activities have less credit risk, but higher bank instability; (2) the decomposition of bank instability indicates that risk-adjusted profitability and capital buffer corresponding to risk-taking are adversely affected by non-interest income; and(3) private banks could gain more diversification benefits of credit risk reduction, while the drawback effect of income diversification on bank stability is lower for state-owned banks. Our findings exhibit the double-edged nature of the shift toward non-interest from interest income, but we have no evidence to support the notion that non-interest income drives bank stability through the transmission impact of credit risk. The study clarifies the ongoing debates about the safety and soundness of income diversification in emerging markets.