The influence of market power on liquidity creation of commercial banks in Vietnam

Tran Thai Ha Nguyen, Gia Quyen Phan, Wing-Keung Wong and Massoud Moslehpour

Journal of Asian Business and Economic Studies, 2022, vol. 30, issue 3, 166-186

Abstract: Purpose - This research examines the relationship between market power and liquidity creation in the specific context of bank profitability in the Vietnamese banking sector. Design/methodology/approach - The study applies the methodology proposed by Berger and Bouwman (2009) to demonstrate the creation of bank liquidity through a three-step procedure for investigating the relationship between market power and liquidity creation. The three steps include non-fat liquidity (NFLC), fat liquidity (FLC) and system generalized method of moments estimation for panel data. Findings - This study finds that liquidity creation increases when a bank has high market power. Further, highly profitable banks positively impact the market power of banks with regard to liquidity creation, relative to less profitable banks. Moreover, bank size, capital, economic growth and interest rate negatively influence bank liquidity creation, while credit risk positively relates to bank liquidity creation. Research limitations/implications - Measurements used in this study are based on the works of Berger and Bouwman (2009). There are specific variations, relative to Basel III. In addition, other variables significantly impact bank liquidity creation that have not been considered in the models, and a quadratic model should have been considered to measure market power and bank liquidity creation. Practical implications - This study suggests that managers should control the liquidity of their banks by supervising vulnerable characteristics that have been mentioned herein and emphasizing improvements in profitability. Further, the government may consider encouraging banks to generate more liquidity by modifying regulations concerned with market power or reinforcing policies about improving the transparent business environment. Originality/value - This study characterizes an attempt to examine the influence of market power on the liquidity creation of banks in Vietnam, which represents one of the most dynamic systems in Asia, with several varied participating banks. The current study also examines the same within the specific context of the modifying impact of the profitability of banks.

Keywords: Liquidity creation; Market power; Price channel; Fragility channel; GMM; Vietnam; G10; G20; E40 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jabesp:jabes-06-2021-0076

DOI: 10.1108/JABES-06-2021-0076

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