Determinants of Vietnamese commercial banks’ liquidity

Abstract

This paper aims to identify the key determinants of commercial banks’ liquidity ratios in Vietnam and test the hypotheses on the directions and the levels of influence these determinants have on examined banks’ liquidity ratios. The fixed effect model (FEM) is applied with data of 182 observations from 26 Vietnamese commercial banks in period 2013 to 2019. The random effect model (REM) is applied with data of 72 observations from the same Vietnamese commercial banks in period 2020 to 2022, during the COVID-19 pandemic. The results indicate that under typical economic conditions, the influences of CAP, SIZE, LLR, GDP, and Inf on banks’ liquidity ratios are not statistically significant. ROA shows a positive correlation, while LDR exhibits a negative correlation with banks’ liquidity ratios. However, during the COVID-19 period, the relationships between ROA, SIZE, GDP, Inf and liquidity ratios deviate from those observed in the period from 2013 to 2019. Specifically, ROA's influence on banks’ liquidity ratios becomes statistically insignificant. SIZE, LDR, and GDP display negative correlations with examined banks’ liquidity ratios, inflation rate demonstrates a positive relationship with examined banks’ liquidity ratios. The results imply the following: Firstly, Vietnamese bank managers and policymakers should focus on maintaining robust profitability (ROA) and effectively managing the loan-to-deposit ratio (LDR) to sustain banks' liquidity under stable economic conditions. Secondly, during economic crises such as the COVID-19 pandemic, in addition to LDR, they should also consider the impact of bank size, GDP, and inflation rate to adjust liquidity management strategies in response to changing economic conditions.