Liquidity injection, bank lending, and security holdings: The asymmetric effects in Vietnam
Van Dan Dang and
Van Cuong Dang
The Journal of Economic Asymmetries, 2021, vol. 24, issue C
The study examines how banks rebalance their lending and security holdings in response to the monetary policy adjustments by the central bank's liquidity injection. It is concerned that banks may not use the additional liquidity to loan out to the economy, but they instead get more involved in security holdings. Using a sample of Vietnamese banks during 2007–2018, we find an asymmetric portfolio expansion strategy indicating that banks increase the purchases of securities far more rapidly than they treat their loan portfolio. Further analyzing the compositions of security holdings, we document that banks favorite government and financial bonds, as opposed to corporate bonds. This pattern implies that some capital flows seem not to reach the borrowers in the real sectors. Most prominently, we corroborate banks' asymmetric reactions according to the level of financial soundness. Concretely, less (compared to more) stable banks take more risks amid the monetary policy easing in the sense that their loan portfolio grows faster while their security holdings spread slower. All of our findings are robust across (i) changes in econometric techniques of static and dynamic panels, (ii) alternative indicators of monetary policy, (iii) different measures for bank soundness by the Z-score index and credit risk by non-performing loans, and (iv) multiple modified sets of control factors. Consequently, the securities preference over credit in the sound time may worry the regulatory authorities. This study feeds into the hot debate in Vietnam and other emerging countries as well, on the restriction of security trading and credit growth, and the scale of the central bank's asset purchases to avoid excessive liquidity.
Keywords: Asymmetric effects; Bank lending; Bank soundness; Liquidity injection; Monetary policy; Security holdings (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:24:y:2021:i:c:s1703494921000177
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