Bank lending channel and monetary policy transmission in Vietnam

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMY City. HO CHI MINH

--------------------

NGUYEN ANH TUAN

BANK LOANS CHANNEL

AND MONEY POLICY TRANSFER IN VIETNAM

Major: Finance - Banking Code: 60340201

MASTER THESIS OF ECONOMY

SCIENTIFIC GUIDE: Assoc. Dr. NGUYEN NGOC DINH

City. Ho Chi Minh – Year 2016

GUARANTEE

I hereby declare that the topic " Bank lending channel and monetary policy transmission in Vietnam " is my own research topic under the guidance of the Scientific Instructor. Statistics are collected from reliable sources, the content and research results have not been published in any other scientific work up to this point.

City. Ho Chi Minh, April 30, 2016 Author Thesis

Nguyen Anh Tuan

TABLE OF CONTENTS

ADDENDUM COVER ASSISTANCE OF CONTENTS TABLE OF CONTENTS

LIST OF abbreviations ONLY LIST OF TABLES

LIST OF PICTURES SUMMARY

CHAPTER 1. INTRODUCTION 1

1.1. Research problem 1

1.2. Research objectives 4

1.3. Research object and scope 4

1.4. Research Method 4

1.5. Practical significance of the research topic 5

1.6. Structure of research paper 5

CHAPTER 2. THEORETICAL OVERVIEW AND PRIVATE RESEARCH 7

2.1. 7 . theoretical overview

2.1.1. Traditional interest rate channel and credit channel 7

2.1.2. Factors determining bank lending channel 11

2.2. Empirical evidence on bank lending channel 14

2.3. Previous studies on bank lending channel 16

2.3.1. Studies in the world 16

2.3.2. Studies in Vietnam 19

CHAPTER 3. RESEARCH METHODS 22

3.1. Research model 22

3.2. Research Methods 27

3.3. Research data 30

CHAPTER 4. RESEARCH RESULTS 35

4.1. Asymmetric impact of monetary policy on bank credit supply.35

4.2. Macroeconomic impact of bank lending channel 55

CHAPTER 5. CONCLUSION 63

5.1. Main results of the study 63

5.2. Limitations of the topic and directions for further research

5.3. Some recommendations and policy suggestions 68

LIST OF REFERENCES APPENDIX

LIST OF ABBREVIATIONS ONLY

ADB : Asian Development Bank

AR : Autoregressive

CEE : Central and Eastern European

CPI : Consumer Price Index

DGMM : Difference Generalized Method of Moments EMU : Economic and Monetary Union

FEM : Fixed Effect Model

GDP : Gross Domestic Products GMM : General Method of Moments

HAC : Heteroskedasticity and Autocorrelation HNX : Hanoi Stock Exchange

HOSE : Ho Chi Minh City Stock Exchange IMF : International Monetary Fund

LM : Lagrange Multiplier

MCI : Monetary Condition Index

NACE : National Association of Corrosion Engineers Commercial Bank : Commercial Bank

OLS : Ordinary Least Squares

REM : Random Effect Model

SGMM : System Generalized Method of Moments SVAR : Structural Vector Autoregression

USD : United States Dollar

VAR : Vector Autoregression

VECM : Vector Error Correction Model VND : Viet Nam Dong

VNIBOR 3M : Vietnam Interbank Offered Rate 3 Months WTO : World Trade Organization

Table 1.1. Economic credit to GDP ratio of Vietnam 3

Table 3.1. Variables in the model and expected correlation 26

Table 3.2. Descriptive statistics for variables 33

Table 4.1. Estimations of equation (4.1) using bank data 37

Table 4.2. Legal capital for credit institutions in Vietnam 50

Table 4.3. 54 . Selective Bias Tests

Table 4.4. Macroeconomic impacts of bank lending channel 57

Table 4.5. Credit market share of Vietnamese commercial banks ..59

Figure 1.1. Credit market share of Vietnamese banks in the period 2007 - 2011 3

Figure 3.1. Vietnam monetary policy index for the period 2005 - 2014 32

Figure 4.1. Credit growth, GDP, CPI of Vietnam in the period 2001 - 2011 ..43 Figure 4.2. Credit growth, size, liquidity and bank capitalization 45

Figure 4.3. Proportion of Vietnam's bank asset portfolio for the period 2005-2014..48 Figure 4.4. Relationship between capital source and bank capitalization in 2011 51

Figure 4.5. Credit to GDP ratio of Vietnam in the period 2007 - 2012 61

This paper conducts a systematic empirical study on the bank lending channel in monetary policy transmission in Vietnam. We specifically examine whether differences in the impact of monetary policy changes on bank credit depend on the size, liquidity, and capitalization of banks. The study uses panel data of 30 Vietnamese commercial banks in the period 2005 - 2014, and dynamic panel estimation techniques to estimate a bank credit function that takes into account not only the monetary policy index currency and macroeconomic variables, but also take into account bank-specific characteristics and differences in bank lending responses to monetary policy moves. The research results show evidence of the existence of a bank lending channel in Vietnam. Among them, the characteristics of bank size and capitalization seem to play the most important role in distinguishing the responses of banks to changes in monetary policy, while the role of liquidity characteristics is not clearly expressed. We also study the macroeconomic effects of the bank lending channel and find evidence of a link between the overall supply of bank credit and real economic activity in Vietnam.

Key word:

Monetary policy transmission Vietnam bank lending channel

CHAPTER 1 INTRODUCTION

1.1. Research problem

Monetary policy is viewed as the actions taken by the central bank to affect the money supply or interest rates of the economy. With the goal of stabilizing prices and promoting economic development, the central bank uses monetary policy tools such as operating interest rates, open market operations, required reserves, etc. to influence to macro variables in the economy. That impact process is the transmission process of monetary policy.

The analysis of monetary policy transmission, i.e. how changes in monetary policy affect the real economy, is one of the most studied areas in the economic literature. macro and is a special concern of central banks. Recently found theories and empirical evidence, step by step shed light on the transmission of monetary policy. Mishkin (1996) was one of the first economists to have systematic studies of monetary policy transmission channels. In addition to the traditional transmission channel of interest rates according to Keynesian economics, Mishkin (1996) also developed the theory of money transmission through other channels such as exchange rates, stock prices, and credit channels.

Under the traditional interest rate channel, a change in the policy rate affects the real economy by affecting different relative prices. A higher cost of capital will increase the required return of an investment, and thereby reduce the expenditure on the investment. Changes in interest rates also affect consumption, as higher interest rates lower consumer prices in the future. In the case of a floating exchange rate regime, interest rate movements will affect the nominal exchange rate, competitive price level, and thus net exports. However, the theory of the interest rate channel omits several important processes in the banking industry.

The credit channel view acknowledges the existence of information asymmetries (or information imperfections) in financial markets and posits a positive role for bank credit supply in money transmission. bad across two channels

– the balance sheet channel, which holds that tight monetary policy can exacerbate the risk characteristics of borrowers and reduce the supply of credit, and the bank lending channel, arguing that central bank policy The central bank can affect bank balance sheets and therefore also the supply of credit. The second transmission channel, i.e. bank lending, is of particular interest to us in this paper, as it focuses more specifically on the special role of banks in the transmission mechanism. monetary policy.

The implication of the bank lending channel is that the response of bank credits to changes in monetary policy will vary depending on the characteristics of the bank or the strength of the bank's balance sheet. In general, the lending behavior of banks with weak balance sheets is more sensitive to currency shocks than banks with strong balance sheets. The current literature has highlighted three major banking characteristics, or criteria for assessing balance sheet strength, that can affect the response of bank credits to a change in monetary policy. First, asset size (Kashyap and Stein, 1995, 2000; Kishan and Opiela, 2000); second, bank capitalization (Peek and Rosengren, 1995; Kishan and Opiela, 2000, 2006); third, liquidity (Kashyap and Stein, 2000).

In Vietnam 1 , at present, the stock market is not yet developed, the level of capital contribution to the economy is still modest, and other capital mobilization channels are not easily accessible when the financial system has not reached the level of development yet. With high development, bank credit seems to be the main source of capital for the economy. Credit balance relative to GDP has continuously increased over the years (see Table 1.1). Macroeconomic conditions show that the bank lending channel is likely to exist and is an important transmission channel in the transmission mechanism of monetary policy in Vietnam.

1 For a detailed analysis of the characteristics of the Vietnamese banking industry, see Appendix A.

Table 1.1. The ratio of the economy's credit to Vietnam's GDP

Five	2005	2006	2007	2008	2009	2010	2011	2012
Credit-to-GDP ratio (%)	71.22	75.38	96.19	94.53	123.01	135.79	120.86	115.40

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Source: Trading Economics – World Bank

Credit market share (%)

State-owned commercial banks Joint stock banks Foreign banks Other

2007

2008

2009

2010

2011

However, the market concentration of Vietnam's banking industry is relatively high. Figure 1.1 shows that the credit market is dominated by a small number of large banks (mostly state-owned banks), which may understate the importance of the lending channel. banks in money transmission.


9.2	11	9.1	9	8.6
27.7	26.5	32	35.1	35.5
59.3	58.1
		54.1	51.4	51.3

Figure 1.1. Credit market share of Vietnamese banks in the period 2007 - 2011

Source: VNEconomy

Therefore, in order to draw conclusions about the role of the banking sector in Vietnam in monetary policy transmission, it is necessary to carry out some formal empirical tests. In general, empirical studies on bank lending channels in Vietnam are currently very limited, and mainly research in the overview of monetary policy transmission channels in Vietnam in general. but lacking in-depth research articles on the bank lending channel - an important transmission channel in economies with underdeveloped financial markets like in Vietnam.

Therefore, we conduct an empirical study on “ Bank lending channel and monetary policy transmission in Vietnam ”.

1.2. Objectives of the study

The objective of this study is to understand the role of the bank lending channel in the monetary policy transmission of the State Bank of Vietnam.

To accomplish this goal, we will answer the following questions in turn:

- Firstly, how does monetary policy affect credit growth of Vietnamese commercial banks?

- Second, how does credit growth of Vietnamese commercial banks affect real economic activities?

1.3. Object and scope of the study

The main research object of this paper is the changes in lending behavior of Vietnamese commercial banks with different characteristics in terms of size, liquidity, capitalization before tightening monetary shocks; and the elasticity of national output growth to overall bank credit growth.

From there, conclusions are drawn about the role of the bank lending channel in the transmission of monetary policy of the State Bank of Vietnam in the period from 2005 to 2014.

1.4. Research Methods

This study uses panel data of 30 Vietnamese commercial banks for the period 2005 - 2014, and dynamic panel estimation techniques to estimate a credit growth model built on the model of credit growth. Credit Manager by Matousek and Sarantis (2009). We want to examine specifically whether differences in bank credit responses to changes in monetary policy depend on bank size, liquidity, and capitalization characteristics. or not. This can help to understand the influencing factors

to the ability of the banking system to absorb capital to withstand currency shocks. From there, it is possible to assess the impact of monetary policy on the supply of bank credit.

To assess the importance of the bank lending channel in the monetary policy transmission mechanism, we further examine the macro effects of the bank lending channel on the real economy by using a different method. The method is similar to Ashcraft (2006) used for the US, and not long ago has been applied by Matousek and Sarantis (2009) to the countries of Central and Eastern Europe. This method requires using aggregate banking data and looking for differences in the response of (a) overall bank credit growth across the credit market share of large, liquid banks. good, and high capitalization, and (b) growth in national output on overall bank credit growth.

1.5. The practical significance of the research topic

The existence of a bank lending channel in the transmission mechanism has a very important implication for monetary policy: the transmission of monetary policy depends on the structure of the financial system. This means that structural changes in the financial sector can impact money transmission. Furthermore, monetary policy can also have a distributive effect, as individual banks with different (or distinctive) characteristics will have an asymmetrical response to a currency shock. . Therefore, understanding how the State Bank's monetary policy is transmitted into the economy will help policymakers have a correct view and appropriate steps to operate. the macroeconomy in the most efficient manner.

1.6. Structure of the research paper

The structure of this research paper consists of five chapters. The first chapter introduces the research problem and the objectives to which this study is directed. Chapter 2 provides an overview of the underlying theories of money transmission channels

with a particular focus on the bank lending channel, and previous empirical studies on the bank lending channel. Chapter 3 will explain the models, data collection methods, and econometric methods used in the study. Chapter 4 presents and analyzes the empirical results on the bank lending channel, as well as the macroeconomic impacts of the bank lending channel in Vietnam. The final chapter contains conclusions and recommendations.

CHAPTER 2

THEORY OVERVIEW

AND PRIOR STUDIES

2.1. Theoretical overview

2.1.1. Traditional interest rate channel and credit channel

Mishkin (1996) was one of the first economists to have systematic studies of monetary policy transmission channels. In addition to the traditional transmission channel of interest rates according to Keynesian economics, Mishkin (1996) also developed the theory of money transmission through other channels such as exchange rates, stock prices, and credit channels.

According to the traditional interest rate channel (or money channel), a change in the policy rate affects long-term interest rates, which in turn affects the real economy by affecting price levels. relatively different in the economy. The importance of interest rate pass-through is that it is based on real rather than nominal interest rates and on long-term rather than short-term rates (Mishkin, 1996). Crucially, they are sticky prices, i.e. prices are slow to change relative to market movements, so that expansionary monetary policy reduces short-run nominal interest rates as well. short-term real interest rates. The term structure hypothesis expects that a lower real short-term interest rate will lead to a fall in long-term real interest rates.

In an overview of different views on money transmission, Bean et al. (2003) have shown the components of the interest rate channel as follows. First, the higher the interest rate and therefore the higher the cost of capital, increases the required return of an investment project and reduces investment expenditures. Second, an increase in the interest rate changes consumption: the impact of monetary tightening can be analyzed in terms of the substitution effect and the income effect. The first effect is inverse, since higher interest rates will lower consumer prices in the future