The determinants of Vietnamese banks’ lending behavior: A theoretical model and empirical evidence

The purpose of this paper is to theoretically and empirically examine the lending behavior of Vietnamese banks.

A firm-banking model was established, considering risk-taking behavior and the regulatory environment. Based on the theoretical model, a simultaneous equation system was specified that considered loan growth and deposit growth as endogenous variables to empirically investigate lending behavior in Vietnam’s banking sector. Two-stage least square estimators were employed using a micro-level panel data set comprising 39 Vietnamese commercial banks.

The empirical results demonstrate the divergence in the lending behavior of private and state-owned banks. The regressions results support the predictions of the theoretical model on the positive effect of economic growth and the negative effect of the government bond rate on bank lending. The results also suggest that deposit growth and liquidity constraint significantly influence loan supply in private banks, while equity growth is the determinant of lending behavior in state-owned banks. Nevertheless, the banks’ non-performing loan rate, which proxies for the expected default probability of loans, is found to not significantly affect loan supply.

Despite the efforts to capture the idiosyncratic characteristics of the Vietnamese banking system, this study does not fully take into account distinctive nature of the Vietnamese banking system.

The paper suggests implications for the government monetary policy.

The contribution of this paper is twofold. First, it introduces a firm-banking theoretical model that allows banks offering different lending rates and modeled under different aspects of modern banking such as risk-taking behavior and regulatory environment. Second, it is a very first study empirically investigating the lending behavior of Vietnamese banks.