Accepted Manuscript

Bank lending behavior in emerging markets

Xuan Vinh Vo

PII: S1544-6123(17)30623-2
DOI: 10.1016/j.frl.2018.02.011
Reference: FRL 864

To appear in: Finance Research Letters

Received date: 2 October 2017

Revised date: 24 January 2018
Accepted date: 22 February 2018

Please cite this article as: Xuan Vinh Vo , Bank lending behavior in emerging markets, Finance Re-
search Letters (2018), doi: 10.1016/j.frl.2018.02.011

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Highlights

 We investigate the bank lending behavior in an emerging market.

 We find that bank lending behavior is significantly influenced by bank specific characteristics and
macroeconomic factors.
 We do not find a significant impact of bank market structure on lending

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Bank lending behavior in emerging markets

Xuan Vinh Voab

a
University of Economics Ho Chi Minh City, Vietnam

59C Nguyen Dinh Chieu Street - District 3 – Ho Chi Minh City - Vietnam

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b
CFVG Ho Chi Minh City

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91 Ba Thang Hai Street, District 10, Ho Chi Minh City

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Email: vinhvx@ueh.edu.vn

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Abstract
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This article sheds further light on the bank lending behavior of Vietnam, an important emerging
market. Motivated by the fact that most of emerging economies tend to finance economic growth
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by bank lending, we analyze the determinants of bank lending using a sample of Vietnamese
banks. Employing a number of econometric estimation approaches for robust result, we find that
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bank lending behavior is significantly depending on bank specific characteristics and

macroeconomic factors. We do not find a significant impact of bank market structure on bank
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lending. The current paper has strong implications in the context of Vietnam where the problem
of high non-performing loans has taken heavy toll on the economy.
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Keywords: bank lending behavior, emerging markets, financial system, Vietnam.

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JEL Classifications: F21, F23, F36, G01, G21

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1. Introduction

Banking system plays a critical role in fueling economic growth. Banks also play a crucial role in
the transmission of monetary policy (Cetorelli & Goldberg 2012). Further, bank lending plays a
pivotal role in explaining the effects of policy on the economy (Kishan & Opiela 2000).

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However, banking crisis could also bring the global economy into recession. Evidence from the

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recent global financial crisis highlights the importance of maintaining a sound banking system
(Ho et al. 2016). More importantly, understanding bank lending behavior is crucial for bank

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management in maintaining the soundness of a banking system.

In the last few decades, developing countries substantially inject a huge amount of money into

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state-controlled banks to promote economic growth. This results in a significant credit growth by
the banking system in emerging economies. The bank credits help to fuel economic growth in
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these countries. However, there also exist many problems in the banking system in these
countries where bank lending is largely influenced by the government (Qian et al. 2015).

This paper provides further insight into the bank lending behavior in emerging countries.
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Towards this end, we employ a panel data set of commercial banks in Vietnam covering the
period from 2006 to 2015. We also utilize a number of econometric techniques to achieve a
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robust result.

Vietnam offers an interesting setting to study bank lending behavior. Vietnam is a small and
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open economy which is characterized with resilient economic growth and macroeconomic
stability (Vo 2016). In contrast with the growing potential of the economy, the banking system in
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Vietnam is facing several problems in the last few years. Banking market in Vietnam is
characterized by the domination in market share of the state banks (Batten & Vo 2016).
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Government own banks offer many different features to render a further analysis (Sapienza
2004). Foreign banks enter the Vietnam market with their own market segment while local
private banks are much smaller in size.

Recent problems associated with Vietnamese banking system include the poor credit quality and
high level of problematic loans. The capital buffers are also deteriorating because banks tend to
follow aggressive lending behavior. Most of banks have high loan growth relatively to internal

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capital generation. More importantly, credit growth is not supported by limited external capital.
Even though the government commits to provide systemic support for state and private bank, the
government has limited capacity for capital injections into banks. More problematically,
government’s support tends be in the form of liquidity assistance and regulatory tolerance. This
is more severe in countries where regulatory controls are considered less exacting as in Vietnam
(Bryce et al. 2015).

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Our paper is related to a number of previous studies in the current literature. More specially, our

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paper lies in a number of papers study the bank lending behavior during the global financial

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crisis. For example, Ivashina & Scharfstein (2010) investigate the bank lending during the global
financial crisis of 2008 which focus on the extent to which a bank is financed by short-term debt
rather than insured deposits, and its exposure to credit- line drawdowns. Cull & Peria (2013)

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examine the impact of different ownership types on bank lending during financial crisis using a
data from Latin America and Eastern Europe. Coleman & Feler (2015) also focus on the link
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between ownership and bank lending during the financial crisis using a data set covering
Brazilian banks during financial crisis. Using a panel data set of banks in European countries,
Meriläinen (2016) explores how bank credit growth is affected by the 2008–2009 financial crisis
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and the subsequent sovereign debt crisis. Berger & Udell (2004) propose the institutional
memory hypothesis in explaining the procyclicality of bank lending, which is driven by
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deterioration in the ability of loan officers over the bank’s lending cycle that results in an easing
of credit standards.
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The current paper has relevant policy implications. In particular, the paper offers interesting
insights into the policy debate of bank lending behavior in emerging markets. Moreover, bank
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lending is important in the process of allocation of financial resources to fuel productivity and
economic growth. In addition, banks play an important role in credit channel in the monetary
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policy transmission. Further, bank lending is relevant to policy making process because it is
considered as an information transmission channel in capital markets (Lummer & McConnell
1989; Rodnyansky & Darmouni 2016).

The remainder of the paper is organized as follows. Section 2 introduces the methodology.
Section 3 reports the results and discussion of results. Section 4 provides some concluding
remarks.

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2. Methodology

Data

Our data are collected from Bankscope and Vietstock. The final sample is an unbalanced dataset
including 37 Vietnamese commercial banks for the period from 2006 to 2015.

Model

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To explore the bank lending behavior, we employ a dynamic approach which is represented by

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the following equation:

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where
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is the proxy for bank lending behavior, measure by the growth rate of bank loan.
In this study, lending growth is an important measure of bank lending behavior because bank
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lending growth is monitored by Vietnam financial and banking supervisory authority. This
indicator also reflects the financial strength and soundness of the bank since local authority
determines the lending growth rate relying on the evaluation of commercial bank soundness.
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We also employ a number of variables which potentially explain bank lending behavior of
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Vietnamese commercial banks. These include a number of bank specific, market structure and
macroeconomic variables.
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is a vector of bank specific variables, including: SIZE is a measure of bank size, calculated
as the logarithm of the total assets at the end of the year. CAR is a capital adequacy variable,
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measured by the common capital asset ratio at the end of year. RISK is a proxy for bank risk,
which is measured by the provisions for credit risk at the end of year. EXPS is a measure of
operation costs, which is proxied by the ratio of operation expense to total assets. ROA is a
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measure of bank productivity, which is calculated as the return on assets.

We also control for bank industry market structure in our model, is bank industry
variable, in this paper we use CONC, which is a proxy employed to measure the effects of
market structure on bank profitability. In this paper we use the Herfindahl-Hirschman

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concentration index as a proxy for market structure, which is calculated as the summation of the
squared bank market share for each bank using bank asset ratio.

represents two measures of macroeconomic environment. The former is the

inflation measure (INF) and the latter is GDP growth (GROWTH). Sharpe (1990) suggest that
macroeconomic or business cycle implications are relevant because the cost of credit
intermediation is associated with the collapse of financial institutions.

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Estimation method

We employ a number of econometric estimation techniques which have been standard approach

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for panel data analysis. Particularly, we first apply the common least squares estimation. We then
utilize the standard procedure for panel data to estimate the equation model using both fixed

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effects and random effects. The Hausman test is employed for the preference between fixed
effects and random effects. This test suggests that the fixed effects estimator is preferred. To
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conserve space, we only report fixed effects estimation results.

We also use the dynamic model approach to allow for the dynamic nature of our model
specification. This is important since the dynamic model setting is relevant in investigating the
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nature of bank lending behavior. Specially, we employ the GMM estimator of Arellano and
Bond (1991) to estimate the model to address the biasedness and inconsistency. Moreover,
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GMM is a natural choice for our data sample since this estimation approach allows us to control
for the endogeneity problem in the estimation of bank lending.
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3. Results and Discussion of Results

Table 1 reports the descriptive statistics of the variables employed in this paper. Overall, we find
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that Vietnamese banks play an important role in supplying credit for the economy where bank
credit growth are increasing over time.
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Table 1

This table presents the descriptive statistics for the variables employed in the analysis. LENDING is calculated as
the growth rate of bank loan. SIZE is a proxy for bank size, which is calculated as the logarithm of the total assets at
the end of the year. CAR is a measure of capital adequacy, which is measured by the common capital asset ratio at
the end of year. RISK is a bank risk variable, which is measured by the provisions for credit risk at the end of year.

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EXPS is a proxy for operation costs, which is calculated as the ratio of operation expense to total assets. ROA is a

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measure of bank productivity, which is calculated as the return on assets. CONC is a proxy for bank market
concentration, which is calculated as the summation of the squared bank market share for each bank using bank

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asset ratio. INF is a proxy for inflation measure. GDP is the GDP growth.

Mean Median Maximum Minimum Observations

LENDING 0.5035 0.2491 11.3173 -0.4076 288
SIZE
CAR
RISK
17.5062
0.1275
0.0346
17.4587
0.1006
0.0107
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0.6141
6.4943
13.0115
0.0291
-0.0042
288
288
288
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EXPS 0.0158 0.0150 0.0692 -0.0098 288
ROA 0.0137 0.0112 0.1583 0.0002 288
CONC 0.0974 0.0940 0.1588 0.0750 288
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GDP 0.0606 0.0598 0.0713 0.0525 288

INF 0.0972 0.0830 0.2312 0.0088 288
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Table 2 presents the matrix of correlation coefficients between variables employed in the
analysis. This table shows an initial overview of the link between variables. This table also show
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that all of the correlation coefficients are less than 0.8 thereby, confirming there is no problem of
multicollinearity in regression estimation.
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Table 2

This table presents the matrix of correlation coefficients between variables. LENDING is the bank lending measure,
which is calculated as the growth rate of bank loan. SIZE, is a proxy for bank size, is calculated as the logarithm of
the total assets at the end of the year. CAR is a measure of capital adequacy, which is measured by the common
capital asset ratio at the end of year. RISK is a bank risk variable, which is measured by the ratio of the provisions

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for credit risk to the total assets at the end of year. EXPS is a proxy for operation costs, which is calculated as the

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ratio of operation expense to the total assets. ROA is a measure of bank productivity, which is calculated as the
return on assets. CONC is calculated as the summation of the squared bank market share for each bank using bank

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asset ratio. INF is a proxy for inflation measure. GDP is the GDP growth.

LENDING SIZE CAR RISK EXPS ROA CONC GDP INF

LENDING 1
SIZE
CAR
RISK
-0.252
0.084
-0.024
1
-0.703
0.074
1
-0.027
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1
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EXPS -0.195 -0.118 0.441 0.063 1
ROA 0.086 -0.260 0.368 0.003 0.037 1
CONC 0.196 -0.385 0.172 -0.015 -0.146 0.145 1
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GDP 0.207 -0.155 0.021 -0.012 -0.265 0.148 0.475 1

INF -0.079 -0.155 0.110 -0.054 -0.031 0.109 -0.057 -0.165 1
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Table 3 reports the estimation results. Overall, we observe some important findings. Firstly, we
observe that our lagged dependent variable is positive but not significant in explaining
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contemporaneous dependent variable. This positive estimate justifies the use of dynamic model
however, this indicates that the lending behavior in Vietnamese banks is not highly persistent.
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This finding is important in reflecting the uniqueness of the bank lending decision in Vietnamese
banks.
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We find that the coefficients for bank size are negative and significant in most of regressions.
This highlights that large banks tend to be more cautious in their lending practice. On the other
hand, smaller banks tend to have higher lending growth rate. This is important in the sense that
smaller banks tend to be riskier in their lending practice. More importantly, the finding has
strong implications for supervisory body in managing system risk because smaller banks tend to
lend more during the time of financial turmoil. During this period of financial distress, smaller

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banks tend to make more loan to cover the decrease in bank profitability. Our result also offers
explanation for the current problematic issue in the Vietnamese banking system where several
small banks have the high ratio of non-performing-loan and have to be merged into larger banks.

A clear understanding of the link between bank capital and bank lending is a critical topic
covered by several banking studies (Kim & Sohn 2017). Previous studies confirm a strong link
between capital requirement and credit risk and aggregate bank lending (Diamond & Rajan

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2000; Thakor 1996; Zelenyuk et al. 2017). Cornett et al. (2011) assert that banks with higher

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capital ratios sustain bank lending better than other banks during financial crisis while Ivashina

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& Scharfstein (2010) state that banks with better access to liquid funding cut their lending less.
We find that banks with lower capital asset ratio (CAR ratio) are associated with higher lending
growth. The result is inconsistent with our expectation and risk management standard. This

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indicates the importance of a strict adoption of the prudential standard in bank management. In
the process of transition to global regulatory standard, bank should hold increasing capital
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requirements and reduce bank lending activities. This finding is in line with previous finding that
the effects of changes in capital requirements might be different during the transition to higher
global regulator standards (Bridges et al. 2014).
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Interestingly, we find a negative link between bank expenses and lending growth. This finding
reflects the management behavior of Vietnamese banks where expenses are not allocated to
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reduce asymmetric information in credit activities. Further, this implies that Vietnamese banks
are not likely to devote their expenses to credit and lending activities. Given the inefficiency of
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banks in emerging markets, this suggests that Vietnamese banks tend to provide costs to other
non-credit activities and this is an important finding with respect to cost efficiency management.
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Credit activity related expenses is also important to reduce credit risk. This is more pronounced
in the context of Vietnam where banks are facing the problem of high non-performing loan ratio.
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As to the impact of bank market structure on bank lending behavior, which we track by the
concentration ratio, we do not find statistically significant evidence that the bank market factor
affects bank lending behavior. This finding is at odd with the outcome of studies using advanced
countries data (Braggion et al. 2017; Dell'Ariccia & Marquez 2006). This implies that bank
market concentration is irrelevant in explaining bank lending behavior of Vietnamese banks.
This highlights that Vietnam bank market offers huge potential for foreign bank entry.

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We document a positive and significant link between economic growth and bank lending. This
result is consistent with our expectation because the increase in economic growth is positively
associated with the increase in economic activities. This confirms that bank credit is still an
important form of financing for Vietnamese firms and fueling the economic growth.

The reported negative link between inflation and bank lending in this article suggests that
Vietnamese banks are likely to support the government approach in curbing the inflation by

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limiting their lending activities in high inflationary environment. Based on the bank lending

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channel, central bank could promote the monetary policy by forcing bank to increase or decrease

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loans (Apergis & Christou 2015). This evidence is unique in the context of Vietnam because
previous studies suggest a weaker transmission of monetary policy shocks to bank lending than
do advanced economies (Mishra et al. 2014).

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Table 3:

Bank lending behavior in Vietnam.

This table presents Least Squares, Panel Fixed Effects, and GMM regression results of the equation
, in
which is the measure of bank lending behavior, calculated by the growth rate of bank loan; is a

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vector of bank specific variables, including: SIZE is a proxy for bank size, which is calculated as the logarithm of

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the total assets at the end of the year; CAR is a measure of capital adequacy, which is measured by the common
capital asset ratio at the end of year; RISK is a bank risk variable, which is measured by the ratio of the provisions

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for credit risk to the total assets at the end of year; EXPS is a proxy for operation costs, which is calculated by the
ratio of operation expense to total assets; ROA is a measure of bank productivity, which is calculated as the return
on assets. is bank industry variable, proxied by the Herfindahl-Hirschman concentration index (CONC),

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which is calculated as the summation of the squared bank market share for each bank using bank asset ratio.
are two measures of macroeconomic environment, including inflation measure (INF) and GDP
growth (GDP). The symbols *,**, *** indicate statistical significance at the 10%, 5% and 1% levels, respectively.
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Least Squares Fixed Effects GMM

Coeff p-value Coeff p-value Coeff p-value

Variable
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C 4.2132*** 0.0061 13.0323*** 0.0001

LENDING(-1) 0.0103 0.3859
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SIZE -0.2266*** 0.0008 -0.6731*** 0.0000 -0.8097*** 0.0000

CAR -0.5257 0.6593 -0.9696 0.5033 -4.0215*** 0.0000
RISK 0.0103 0.9491 -0.0114 0.9433 -0.0221 0.2888
EXPS -28.2337*** 0.0052 -21.6835* 0.0645 -19.5224*** 0.0000
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ROA 2.6432 0.6191 1.9678 0.7371 5.1089 0.1291

CONC 0.5034 0.8812 -9.9538 0.0337 0.4862 0.6540
GDP 14.5042 0.2124 15.9139 0.1592 22.3809*** 0.0000
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INF -2.0038** 0.0486 -3.0847*** 0.0042 -2.5489*** 0.0000

R-squared
0.1396 0.3169
Adjusted R-squared
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0.1149 0.1932
F-statistic
5.6568 2.5622
Prob(F-statistic)
0.0000 0.0000
J-statistic
25.2810
Prob(J-statistic)
0.5031

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4. Conclusion

Bank lending plays an important role in the efficient allocation of financial resources to fuel
economic growth. Bank lending potentially convey information to the capital market regarding
the value and soundness of the borrowing firms (Lummer & McConnell 1989). Recent studies
also highlight that Vietnamese banks should focus on improving bank lending business as the
key banking business (Batten & Vo 2016; Vo 2017). Clearly, exploring the bank lending

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behavior is an important issue for financial stability and bank management.

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This paper analyzes the bank lending behavior in Vietnam, a key emerging market where bank

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lending plays a more pronounced role since most of firm financings are bank credit. Clearly, a
thorough understanding of bank lending behavior is critical in the context of an emerging market
where the problem of non-performing loan is considered as a major obstacle for economic
growth. US
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The study provides some interesting insights into the mechanism that determine the bank lending
behavior in an emerging market. First, our study indicates a low degree of bank lending
persistence. Secondly, we find that bank lending is dependent on both bank specific and
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macroeconomic factors. Thirdly, we do not find a statistically significant impact of bank market
structure on bank lending behavior. The finding from this article offers several important
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implications for the policy making process, especially in the context that foreign banks tend to be
more tighter lending supply dynamics (Albertazzi & Bottero 2014; Popov & Van Horen 2014).
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Exploring the impact of foreign banks or state assistance on domestic bank lending are other
important avenues for further research. Previous studies highlight that bank lending might
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exhibit similar complementarities as real investment of multinational corporations (Liu &

Pogach 2017). Other papers highlight the role of state assistance on bank lending (Bassett et al.
2017) or globalization and bank’s liquidity management (Cetorelli & Goldberg 2012).
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Examining interaction and completion between banks and financial markets is also an interesting
issue (Boot & Thakor 2000; Song & Thakor 2010). In this paper, due to data availability, we do
not consider the impacts of these important factors on domestic bank lending. Further studies
should be continued to explore these and other channels which potentially affect domestic bank
lending behavior.

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