The implication of economic freedom on bank efficiency: an empirical evidence of Vietnamese commercial banksevidence of Vietnamese commercial banks

Abstract

The effect of economic freedom on the economy’s well-being has been widely documented. However, it is absent from the literature of empirical evidence about effect of economic freedom on the banking sector. This study employs the overall economic freedom index and the index’s components which are derived from Heritage Foundation to examine their effect on Vietnamese commercial bank’s effieciency. In first procedure, we obtain efficiency scores of 39 banks in Viet Nam using Data Envelopment Analysis (DEA), over the period 2010-2018 with 299 observations. Then second step, the efficiency scores estimated from DEA method will be regressed on economic freedom indexes, applying truncated regression model combined with bootstrapped confidence intervals while controlling for bank specific characteristics. Additionally, we carry out a sensitive analysis using a fractional logit estimator as a robustness check. We find strong evidence supporting that far greater economic freedom positively impacts the efficiency of banks in Vietnamese banking sector. However, the influence of different economic freedom counterparts on efficiency banking sector is not as uniform as economic freedom overall index such as the higher the degree of property rights, business freedom and freedom from corruption, the better the bank’s performance while negative effects of financial freedom on bank efficiency. Besides, the empirical findings also show the positive relationship between capitalization and bank efficiency as well as credit risk and bank efficiency