Bank opacity and stability in an emerging market

Abstract

Purpose

The paper analyzes the impact of bank opacity on financial stability in an emerging economy.

Design/methodology/approach

Based on a unique dataset of 31 Vietnamese commercial banks from 2007 to 2019, the paper captures earnings opacity via discretionary loan loss provisions and reflects individual bank stability through the accounting-based Z-score index and its disaggregate components. The least squares dummy variable corrected (LSDVC) approach is employed for empirical analysis.

Findings

In contradiction to most studies on developed economies, earnings management improves bank financial stability in Vietnam. Earnings management is more important for the financial stability of smaller banks. Further, the effect of financial information disclosure on bank stability is strengthened by unfavorable macroeconomic conditions, particularly economic downturns, the global financial crisis and uncertain times in banking.

Originality/value

This is the first study to shed light on how bank opacity influences bank financial stability in an emerging market. The evidence with the conditioning roles of bank size and macroeconomic factors, such as uncertainty in banking, is entirely novel in the related literature. Additionally, the paper contributes to a growing body of banking literature by using the LSDVC estimator to examine the association between bank opacity and bank stability.

Citation

Dang, V.D. and Huynh, J. (2023), "Bank opacity and stability in an emerging market", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-03-2022-0514