Revenue Diversification and Banking Risk: Does the State Ownership Matter? Evidence From an Emerging Market

Abstract

Our paper investigates the influence of state ownership on the linkage between revenue diversification and risk of Vietnam domestic commercial banks in the period 2009–2018. By using the Generalized Method of Moments (GMM) estimation for a dynamic panel model, the empirical results indicate that Vietnamese domestic commercial banks with higher state equity are promoted to take more risks in the revenue diversification process. Our findings are robustly checked by a variety of measures of banking risk, income diversification, and state equity. Empirical results from our dynamic model are not only accordant with the previous findings of Batten and Vo [(2016). Bank risk shifting and diversification in an emerging market. Risk Management, 18(4), 217–235] estimated by Ordinary Least Square (OLS) regression on the positive relationship between banking risk and income diversification in Vietnamese domestic commercial banks but also provide new evidence on the tradeoff relationship between risk-return in the operating strategy of Vietnamese state-owned banks in the post-financial crisis. This paper proposes a framework for evaluating the nexus between revenue diversification and risk from the state ownership aspect in other frontier markets.

Do Political Connections and Bank Funding Diversity Increase Non-Performing Loans: New Evidence from the Bayesian Approach

“…An increasing number of studies examine the risk-taking behaviors of commercial banks in Vietnam (Batten and Vo, 2016;Vuong and Nguyen, 2021;Thai et al, 2021). Vo (2018) suggests that Vietnamese firms with higher state ownership have strong political connections in a transitional economy and are exposed to higher business risks.…”

“…For instance, Batten and Vo (2016) investigate the impact of diversification in the context of Vietnamese commercial banks. Vuong and Nguyen (2021) also test the impact of revenue diversification and state ownership on risk-shifting in Vietnamese banks. The shortage of these papers focuses entirely on the impact of revenue diversification on banking risks, while the relationship between bank funding diversity and Vietnamese commercial banks' risk-taking behaviors remains unexplored.…”

“…Larger banks can reach out for more funding sources that lead to the aggressive lending policy, eventually increasing NPLs. Vuong and Nguyen (2021) indicate that larger banks expose to higher lower loan quality due to higher agency costs and information asymmetry. Laeven et al (2016) also report that a growing bank size increases higher systemic.…”

Liquidity creation and bank risk-taking: Evidence from a transition market

“…By engaging in non-traditional segments, banks gain more customer information, better monitor loans, and reduce systemic risk. Conversely [ 16 , 17 ], find that agency problems and a potential loss of focus associated with income diversification into non-interest businesses might result in declining loan quality. Accordingly, bank managers cannot cover all the non-interest investments because of a more convoluting organization and product structure.…”

“…The Vietnamese market has unique characteristics compared to mature banking systems (US, European countries) or emerging markets (China, MENA). The domination of a few large government-owned banks leaves others with a much smaller market share [ 17 ]. [ 21 ] report that government projects might only be financed through state-owned rather than private banks.…”