Banking uncertainty and lending: does bank competition matter?

Abstract

Purpose This paper aims to investigate the link between uncertainty in banking and bank lending behavior, particularly shedding light on the modifying role of bank competition in the nexus. Design/methodology/approach The study uses a panel of Vietnamese banks over the 2007–2019 period for empirical analysis and the dispersion of shocks to bank-level variables to measure banking uncertainty. To strongly confirm our findings, the authors perform a battery of alternative checks based on different econometric techniques, including fixed effect regressions with Driscoll–Kraay standard errors, the two-step system generalized method of moments estimator and the least squares dummy variable-corrected estimator. Findings Uncertainty induces multifaceted unfavorable impacts on bank lending. Concretely, banks tend to restraint loan growth, suffer more credit risk, and charge higher lending rates during periods of higher uncertainty. Further investigation reveals that lending activities of banks with greater market power are less sensitive to adverse uncertainty shocks; in other words, increased competition in the banking system is associated with more substantial consequences of uncertainty on bank lending. Originality/value To the best of the authors’ knowledge, this study is the first attempt to simultaneously explore the impacts of uncertainty on quantity, quality and prices of bank lending. This paper also aim at putting forth the level of uncertainty particularly related to the banking sector. Importantly, examining the conditionality of the linkage between uncertainty and bank lending with respect to bank competition is entirely novel.

Does uncertainty in the banking sector slow down corporate performance?

“…Compared to enterprises endowed with access to the capital market, companies reliant on bank financing tend to experience more pronounced curtailments in investment activities following disruptions in the availability of bank credit (Chava & Purnanandam, 2011). Moreover, the adverse influence of uncertainties on bank credit supply is widely acknowledged across numerous markets (Danisman et al., 2020; Nguyen et al., 2020; Valencia, 2017), including the context of Vietnam (Dang & Nguyen, 2022). This premise posits that with rising uncertainty in banking, firms categorized as bank‐dependent are positioned to endure a more substantial decline in their performance metrics.…”

“…This involves an exploration of the moderating role played by bank debt buffers. This approach is motivated by two significant factors: first, our concentration on uncertainty within the banking sector, and second, the tendency for firms relying on bank financing to experience more pronounced reductions in investments following disruptions in the availability of bank credit (Chava & Purnanandam, 2011), a situation that is notably exacerbated by uncertainty (Dang & Nguyen, 2022; Danisman et al., 2020; Nguyen et al., 2020; Valencia, 2017). Given these rationales, we anticipate that firms' bank debt levels could alter the influence of banking uncertainty on their performance.…”

How does non-interest income affect bank credit risk? Evidence before and during the COVID-19 pandemic

“…Firstly, the banks experienced low loan growth because the businesses did not need to get loans from the banks due to a decline in business activities. Thus, this decrease in loan growth increases the levels of non-performing loans ( Dang and Nguyen, 2022 ). Secondly, businesses struggled to generate income because of decreased business operations; therefore, they could not repay their bank loans during the pandemic.…”

Uncertainty in banking and debt financing of firms in Vietnam

“…Besides, during periods of banking uncertainty, financial institutions may become more risk-averse and tighten their lending criteria [ 45 ]. Consequently, firms might increase their borrowing to secure liquidity in anticipation of future credit constraints, and this preemptive borrowing can lead to an overall rise in corporate debt [ 25 ].…”