Measuring contagion risk among Vietnam’s listed commercial banks

Abstract

Commercial banking system is a dominant sector in the Vietnamese economy. The weakness and failure of one particular bank may have a big impact on the banking system as well as the economy. Given the case study of Lehman Brother Holding Inc. (2008) beyond the United State and the worldwide economies, contagion risk among commercial banks has been an intriguing issuein the literature. During the recession period of Vietnam, there is a need to restructure the banking system and to discover potential risks among commercial banks. Due to the data unavailability, we follow Gropp and Moerman (2004) to raise awareness of the contagion risk across eight listed commercial banks of Vietnam. Particularly, we try to measure how other banks are affected when one bank falls into the extreme event and finds the signal of contagion risk. The result of this paper may lead to implication of the overall picture of the banking system. The names of the listed bank are coded randomly to protect the confidential information of the banks. Three of them (D, E, H) are showing extraordinary vulnerability, whereas two others (B, C) are more stable. While the strongest resistance to contagion is found for the case of Bank F, showing the lowest interconnectedness for both “co-exceedances” and “Granger” test, the other banks in the sample reveal controversial results. To conclude, banks are susceptible to others’ operating situation, and the research should be expanded throughout the whole system with the legal enhancement of data transparency and adequacy.