Factors Affecting Liquidity Risks of Joint Stock Commercial Banks in Vietnam

Abstract

The study uses the audited financial statements of 26 Vietnamese commercial banks listed on the Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HOSE) during the 2008-2018 period to estimate the system GMM model, which provides empirical evidence on the effect of the variables of customer deposit to total assets (DEPO) ratio, loan to assets (LTA) ratio, liquidity of commercial banks (LIQ), credit development (CRD) ratio, external funding (EFD) ratio, and credit loss provision (LLP) ratio on liquidity risk. The study confirms that commercial banks' internal factors play the most important role, and there is no empirical evidence on macro variables that affect liquidity risk. Finally, in accordance with the theoretical framework, the study uses an estimation method with the R language and the bootstrap methodology to give empirical proof of the nonlinear correlation and U-shaped graph between commercial bank size and liquidity risk. The importance of commercial bank size in absorbing and moderating the effects of liquidity shocks is demonstrated, however, excessive growth in commercial bank size would increase liquidity risk in commercial bank operations.

1. Introduction

According to Arif and Anees (2012), a commercial bank is an important part of the financial sector of the economy, performing activities that enhanced both parts of the balance sheet. Specifically, Diamond and Rajan (2005) argued that in terms of assets, the commercial bank performed financing function by using cash flow to lend to undercapitalized entities in the economy, while the liquidity of the commercial bank system mainly came from capital mobilized from savers. The commercial bank plays the role of payment intermediary and contributed to the circulation of the commodity market and transportation. These financial institutions ensure investment capital would contribute to economic growth, support the development of new industries, create more jobs and promote the development. As a result, commercial banks often faced liquidity risk (LR) - the risk that a bank might not meet its obligations (Jenkinson, 2008) because depositors could withdraw money before maturity when commercial banks were unable to balance their capital promptly, thereby they could not repay their depositors (Diamond & Rajan, 2005); Besides, this risk could also reduce the profitability of commercial banks (Chaplin et al., 2000a, 2000b). However, commercial banks had not paid due attention to liquidity risk (Arif & Anees, 2012). Liquidity risk occurred partially because the commercial banking system had not been fully secured with common risk management practices, which led to the collapse of many banks during economic crises (Crowe, 2009). Therefore, the commercial banking system and money management agencies had a more comprehensive view of the role of liquidity in commercial banks.

LR not only affected the profitability but also affected the reputation of the commercial banking system (Jenkinson, 2008). And indeed, LR became a concern and challenge in the era of modern commercial banks (Comptroller of the Currency, 2001). The deposit competition to expand the credit product portfolio including wholesale and capital market with technological innovations changed the structure of capital and risk management (Akhtar, 2007). A bank with good asset quality, high income, and abundant capital could still fail if it failed to maintain liquidity (Crowe, 2009). Therefore, the study provides empirical evidence that the commercial banking system should pay attention to liquidity to cope with changes in monetary policy (Akhtar, 2007). There were a number of other risks that a bank had to face such as credit risk, operating risk, and interest rate risk, which could culminate in form of liquidity risk (Brunnermeier & Yogo, 2009). Therefore, this study is conducted with the expectation of adding to the group of empirical studies on the effect of factors on the liquidity risk of commercial banks.

2. Literature Review

2.1. Theoretical Basis of Risk

There are four main risks that can threaten the sustainability of banks, namely credit risk, market risk, operational risk, and liquidity risk (Puspitasari et al., 2021). Risk is uncertainty or an unstable state. However, not every uncertain state was called a risk (Nguyen, 2020). Only uncertain states that could have the probability of occurrence predicted were called risks (Nguyen, 2011). They could be financial risk and banking risk. Specifically, this study refers to bank liquidity risk, thereby commercial banks fall into insolvency, self-file bankruptcy, or are declared bankrupt by competent authorities (Altman, 1968; Xiaoqing & Hefferman, 2005; Nguyen & Hoang, 2019). Therefore, commercial banks must find ways to meet their liquidity needs in many different ways: (i) Borrowing money in the interbank monetary market, (ii) selling assets in the financial market, (iii) performing foreign exchange swaps, (iv) rediscounting or refinancing operations from the central bank.

2.2. Theoretical Basis of Liquidity and Liquidity Risk

Duttweiler (2011) defined liquidity as the ability to meet all payment obligations upon coming due, the ease to convert an asset into cash, and the acceptance level of the market. For commercial banks, liquidity was the ability to meet the needs of using available funds for business activities at any time such as deposit payment, lending, payment, and capital transaction (BIS, 2009; Praet & Herzberg, 2008).

Liquidity was a term mentioned by Keynes (1930) and Fisher (1930). Under this theory, money is an asset with the highest liquidity, so holding a lot of money will increase liquidity but at the expense of investment opportunities to generate profits. Accordingly, commercial banks with low profits, when focusing on the purpose of increasing profits, would increase their investment in high-risk portfolios, resulting in a decrease in the proportion of liquid assets and a decrease in liquidity (Nguyen, 2016). In contrast, banks with high profits often paid attention to safety and limited excessive credit development and enhancement of more liquid assets to avoid default risk (Bunda & Desquilbet, 2008; Chatterjee & Eyigungor, 2009; Rychtarsik, 2009).

Wilson, Casu, Girardone & Molyneux (2010) argued that credit was still the main business operation of banks. In the condition that the capital of banks is mostly short term capital, commercial lending and short-term financing for liquid assets of enterprises were the best way to ensure liquidity. However, Smith (1776) argued that credit operation could be highly risky during a financial crisis related to meeting requests to withdrawal deposits of customers due to psychological factors.

Moulton (1918) asserted that liquidity was the shiftability or the ability of commercial banks to hedge against liquidity risk through diversification of the portfolio of highly liquid assets or the convertibility of assets at a certain rate (Toby, 2006) as well as the ability to create profits and retained earnings for reinvestment. In contrast, the theory showed that credit operations would not secure liquidity when large numbers of depositors decided to withdraw their funds.

Prochnow (1949) argued that incomes from assets came from assets that matured once and regularly during the life of assets, this expected source of income would increase the liquidity of assets. This theory laid an important foundation for studying the term structure, expected income, or profitability on assets as a measure of liquidity. Profitability is the most appropriate indicator to measure the performance and health of banks (Lopez & Saurina, 2007). Bank profits have a significant negative effect on bank failures (Mayes & Stremmel, 2012; Fukuda et al., 2008; Lopez & Saurina, 2007).

This signaling theory arises (Spence, 1973) because of asymmetric information problems caused by asymmetric conditions of information existing from time to time. Bank size had a positive relation to liquidity, the larger commercial banks were, the easier they were to mobilize capital from many different sources of capital (Sumani & Roziq, 2020). Meanwhile, the too large to fail theory (Greg, 2009) showed that the larger the bank size was, the lower the liquidity of the bank was. Large-scale banks often tend to boldly invest in high-risk assets with the expectation of increasing profits.

According to Basel Committee on Banking Supervision (BIS) (2009), liquidity risk came from the failure of a bank to fulfill its payment obligations because depositors withdrew their funds from the bank, which would create a liquidity trap for the bank (Jeanne & Svensson, 2007) that led to the fact that the bank was unable to increase funding or the ability to finance but had to borrow from the central bank or the interbank market at a high cost (Diamond & Rajan, 2005). Indeed, Bonfim and Kim (2014) argued that commercial banks often faced liquidity risk because the role of a financial intermediary generated liquidity risk when commercial banks had to mobilize deposits to meet credit requirements. Some commercial banks used short term capital structure to finance long-term loans to increase profits, but it was also the cause of credit risk (Diamond & Dybvig, 1983). Many banks focused on wholesale lending (Akhtar, 2007) or long-term lending, which affected the maintenance of the bank’s liquidity position (Kashyap et al., 2002).

LR could be classified into two forms: financing liquidity risk and market liquidity risk (Decker, 2000; Pham, 2019; Gomes & Khan, 2011). Market liquidity risk was a risk that a bank failed to sell assets in the market in a fast time and at a low cost. Financing liquidity risk was a risk that a bank would not be able to meet its debt obligations when such obligations came due to failure to liquidate assets or a lack of funding. These two types of risks often interacted with each other through contagion effect in the financial markets and financial institutions (Diamond & Rajan, 2005). In addition, liquidity risk could also be derived from macro factors and the financial, operating, and management policies of banks (Ali, 2004).

From the perspective of bank liquidity management, surplus or deficit both described the imbalance of banks. Liquidity surplus occurred when the economy fell into a state where investment projects were stagnant, capital failed to be disbursed due to credit appraisal capacity, or capital developed so fast. In contrast, Liquidity deficit was the fact that banks failed to have enough funds to operate, causing banks to lose business opportunities, lose customers, lose markets and reduce the trust from the public (Truong, 2012; Brunnermeier & Yogo, 2009; Falconer, 2001; Plochan, 2007; Ahmed & Duellman, 2012; Goodhart, 2008; Goddard & Wilson, 2009).

LR could be measured by: Financing Gap (Lucchetta, 2007; Bunda & Desquilbet, 2008; Saunders & Cornett, 2006; Chen & Gursoy, 2001; Chen et al., 2018; Ferrouhi & Lahadiri, 2014) and liquidity ratios were various ratios calculated from balance sheets of banks, often used to predict the development trend of liquidity (Bunda & Desquilbet, 2008; Vodová, 2011; Bonfim & Kim, 2014; Munteanu, 2012; Delechat et al., 2012, Ferrouhi & Lahadiri, 2014; Giannotti 2010; Van den End, 2010; Angora & Roulet, 2011; Cucinelli, 2013). According to Vodová (2013a), the liquidity gap was the difference between assets and capital for both the present and the future.

2.3. Study Works on Factors Affecting Liquidity Risk

Aspachs et al. (2005) determined the factors affecting the liquidity of 57 commercial banks in the UK (1985–2003) and used the measurement method by the ratio of total liquid assets to total assets and ratio of total liquid assets to mobilized capital. The result of the fixed effects model showed that the influencing factors were divided into two groups: internal factor and external factor. An internal factor was such as profit margin that measured the opportunity cost of holding liquid assets as well as measured profitability and credit growth of banks. Profit was negatively correlated with liquidity. This study also showed that the higher the credit growth is, the less liquid assets the banks held. In addition, the study also showed that commercial banks that received a lot of support from the central bank often had low liquidity.

Valla et al. (2006) focused on some intrinsic factors and macro variables affecting bank liquidity in France in the 1993–2005 period. They assumed that the correlated factors were the possibility to get support from the central bank, loan growth, GDP growth, short-term interest rates, profitability, and bank size. The result of the regression analysis affirmed that bank size had a positive effect on liquidity. The remaining factors had a negative relation to liquidity.

Lucchetta (2007) at commercial banks in European countries was interested in the effect of macro factors, the role of the interbank market, and the relation among banks. The study used panel data for the 1998–2004 period to examine the relation between investment and lending activities in the interbank market under variable interest rate conditions. The study result showed that GDP, monetary policy (represented by short-term interest rates) affected the bank liquidity. Holding more or less liquid assets of banks depending on whether total assets and total mobilized capital during the period had strong or weak GDP growth rate and therefore banks often built a liquidity buffer (Delechat et al., 2012) during the economic recession. This showed that to stimulate economic development, the central bank used the policy of cutting down interest rates and increasing the amount of base money accordingly, thereby increasing the liquidity supply of banks.

According to the theory of total asset size, Bunda and Desquilbet (2008) used different ratios to evaluate the liquidity of banks in the emerging markets including 36 countries in the 1995–2004 period. This study used the equity-to-asset ratio to evaluate the capital adequacy ratio, thereby, it was found that bank size and equity-to-asset ratio had a positive effect on liquidity risk. The result also identified factors affecting the bank liquidity such as the factor of implementing Basel’s fundamentals (dummy variable) forced banks to have sufficient liquidity reserves; lending rates had a positive effect on liquidity. In addition, macro factors also had an effect on liquidity: the ratio of government spending to GDP, the factor of inflation rate had a positive effect on liquidity. An empirical study also showed that the financial crisis had a positive effect on the liquidity risk in the case of the fixed exchange rate mechanism and a negative effect in the case of the floating exchange rate mechanism.

Rauch et al. (2010) studied panel data of 457 banks in the 1997–2006 period in Germany. The result showed that macro factors such as tight monetary policy had a negative effect on liquidity. If the unemployment rate was high, banks had a lot of highly liquid assets; discount rate had negative relation; GDP growth rate had a strong and positive effect. Micro variables such as savings limit had a positive relation to liquidity, but the study showed that bank size had no effect on liquidity. Rauch et al. (2009) also studied 1, 107 commercial banks in 36 emerging economies in 1997–2006 period. The study result showed that macro factors such as monetary policy had an effect on liquidity risk, which showed the contagion effect from economic crisis to the crisis of the commercial banking system. Diamond and Rajan (2005) stated that a bank might refuse to lend when its liquidity demand was quite high. The study suggested that diversifying loan terms would help create a buffer against liquidity shocks (Holmstrom & Tirole, 2000). Diamond and Rajan (2005) emphasized that the difference in mobilization needs and the ability to finance loans forced commercial banks to change their policy of interest rates.

Vodová (2011, 2013) studied the factors affecting the liquidity of commercial banks in the Czech, Hungary, and Finland. The independent variables included 4 internal variables (equity ratio, total bank assets, NPL ratio, profitability ratio, and 8 external variables of banks (GDP growth, inflation rate, interbank interest rate, unemployment rate, marginal interest rate, credit interest rate, and financial crisis dummy variable. The study result showed that liquidity had a positive relation to equity ratio, the credit interest rate used in all three countries; the NPL ratio, the interbank interest rate in Czech and Finland. In contrast, financial crisis, inflation rate, the economic growth rate had a negative relation to liquidity in the Czech Republic but in the positive relationships in Finland. Total bank assets and liquidity had a negative relation in Slovakia and Finland but nonlinear relation in the Czech Republic. In addition, the study also showed that unemployment rate, marginal interest rate, return on capital and monetary policy rate had no effect on liquidity in the Czech Republic; marginal interest rate and monetary policy interest rate had a negative relation in Hungary and Finland; return on capital had a positive relation in Hungary and negative relation in Finland; unemployment rate had a positive relation to liquidity in Finland.

Munteanu (2012) studied the liquidity risk of 27 commercial banks in Romania before and after the economic crisis in 2002–2007 and 2008–2010 periods. The result showed that the factors contributing to the stability of the commercial banking system played an important role in affecting liquidity risk. Aspachs et al. (2005) studied the factors affecting the liquidity risk (using the ratio of liquid assets to total assets) of 57 commercial banks in the 1985– 2003 period in the US. The study result showed that the holding of liquid assets and the expected profit of commercial banks had a positive relation to the liquidity risk. Gomes and Khan (2011) argued that the interaction between two types of liquidity risk - financing liquidity risk and market liquidity risk could lead to serious consequences, when financing liquidity risk increases, market liquidity reduces and vice versa. Brunnermeier and Pedersen (2009) argued that a series of banks sought to sell assets in the financial markets, creating the risk of market liquidity risk. The sell-off of assets in the market raised interest rates, lowered the price of the collateral. Commercial banks with excess liquidity were also concerned about the contagion effect, so they did not provide liquidity despite high interbank interest rates and this might freeze the asset market.

The financing gap was used by Truong (2013) to assess liquidity risk. The study believed that credit risk was influenced by factors such as total asset size, liquidity reserve, interbank market liquidity, and macroeconomic factors. External financing had a good effect on total capital, equity had a positive effect on total assets, and the loan had a negative effect on total assets, while liquidity reserve had the opposite effect. Furthermore, the overall asset size had a non-linear relationship with LR. Depending on the lag of the variable, the GDP variable had a multi-signal effect. Furthermore, boosting the prior year’s inflation rate INF_t–1 would lower this year’s LR.

Nguyen (2020) studied the effect of non-interest income on risk and profitability. The empirical result at 26 Vietnamese joint-stock commercial banks in the 2008– 2018 period showed that non-interest income increased the risks in commercial banking activities. Vo and Mai (2017) determined the effect of foreign ownership on the liquidity risk of 35 Vietnamese commercial banks in the 2009– 2015 period. The result showed that the higher the foreign ownership was, the lower the liquidity risk of commercial banks was and vice versa. Besides, the study also showed that the LR lagged variable had a positive relation to LR. Vu (2012) studied 37 commercial banks in Vietnam in the 2006–2011 period. The result showed that the effect of the ratio of equity to total assets, the ratio of return on total assets, and the ratio of non-performing loans to total loans had a positive relation with liquidity, while the variables of asset size and the ratio of credit risk provision to total loans were negatively correlated with liquidity.

Tram and Tran (2021) used unbalanced panel data from Bankscope from 171 banks in 9 countries in Southeast Asia over the period 2004–2016 and the Generalized Method of Moments (SGMM) to analyze the impact of liquidity risk on bank performance in Southeast Asian countries. The results show that liquidity risk has a positive effect on the performance of banks or that most banks with good performance have a high liquidity risk under normal conditions. However, if there is a financial crisis, the effect of liquidity risk on bank performance is negative. This means that during the crisis, banks will seek to increase liquidity assets, to improve profitability, which will increase financial costs and reduce bank efficiency. Besides, bank performance in Southeast Asian countries is also influenced by the following factors: impact of the lag variable of bank performance, quality of liquid assets, bank size, bank capital, loan loss provision, GDP growth, money supply, and inflation.

With the above studies, the author clarified the theories that explained the liquidity risk, some liquidity measures for commercial banks, and the policies of the SBV in liquidity management. At the same time, the study also showed the current status of liquidity of commercial banks based on the study model.

3. Research Methods

3.1. Data Source

The data source of the study was taken from the audited financial statements of 26 Vietnamese commercial banks listed on Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) during 2008–2018 period including the following joint stock commercial banks: An Binh Commercial Joint Stock Bank (ABB), Asia Commercial Joint Stock Bank (ACB), Bank for Investment and Development of Vietnam (BIDV), Bao Viet Bank (BVB), Vietnam Joint Stock Commercial Bank for Industry and Trade (CTG), Vietnam Export Import Commercial Joint-Stock Bank (EIB), Ho Chi Minh City Development Joint Stock Commercial Bank (HDB), Kien Long Bank (KLB), LienViet Post Joint Stock Commercial Bank (LPB), Military Commercial Joint Stock Bank (MB), Vietnam Maritime Commercial Joint Stock Bank (MSB), Nam A Commercial Joint Stock Bank (NAB), National Citizen Commercial Joint Stock Bank (NCB), Orient Commercial Joint Stock Bank (OCB), Petrolimex Group Commercial Joint Stock Bank (PGB), Saigon Commercial Joint Stock Bank (SCB), Southeast Asia Commercial Joint Stock Bank (SEA), Saigon Bank For Industry And Trade (SGB), Saigon-Hanoi Commercial Joint Stock Bank (SHB), Sai Gon Thuong Tin Commercial Joint Stock Bank (STB), Vietnam Technological and Commercial Joint Stock Bank (TCB), Tien Phong Commercial Joint Stock Bank (TPB), Joint Stock Commercial Bank for Foreign Trade of Vietnam (VCB), Vietnam International CJS Bank (VIB), Vietnam – Asia Commercial Joint Stock Bank (VAB) and Vietnam Prosperity Joint Stock Commercial Bank (VPB).

3.2. Experimental Model

Study model of the effect of factors on liquidity risk (Pavla, 2011):

L_it = α + β*X_it + δ_it + ε_it        (1)

In which, L_it is LR indicator of the bank I year t, X_it is the vector of the explanatory variable, Beta (β) is the regression coefficient representing the angle factor of the variable. Accordingly, the model is rewritten as follows (Table 1):

\(\begin{aligned} \mathrm{LIQR}_{i, t}=& \beta_{0}+\beta_{1} * \mathrm{LIQR}_{i, t-1}+\beta_{2} * \mathrm{LIQ}_{i, t}+\beta_{3} * \mathrm{ETA}_{i, t} \\ &+\beta_{4} * \mathrm{CRD}_{i, t}+\beta_{5} * \mathrm{SIZE}_{i, t}+\beta_{6} * \mathrm{SIZE}_{i, t}^{2} \\ &+\beta_{7} * \mathrm{DEPO}_{i, t}+\beta_{8} * \mathrm{LLP}_{i, t}+\beta_{9} * \mathrm{LTA}_{i, t} \\ &+\beta_{10} * \mathrm{EFD}_{i, t}+\beta_{11} * \mathrm{ROA}_{i, t}+\beta_{12} * \mathrm{ROE}_{i, t} \\ &+\beta_{13} * \mathrm{NNII}_{i, t}+\beta_{14} * \mathrm{LST}_{i, t}+\beta_{15} * \mathrm{FCR}_{i, t} \\ &+\beta_{16} * \mathrm{GDP}_{i, t}+\beta_{17} * \mathrm{INF}_{i, t}+\beta_{18} * \mathrm{M}_{i, t}+e_{i, t} \end{aligned}\)       (2)

Table 1: Detailed Description of Variables in the Regression Model

3.3. Study Method

The study used the panel data regression approach with fixed effects model (FEM), random effects model (REM), feasible generalized least squares (FGLS) (Wooldridge, 2002), and D&K (Drisscoll & Kraay, 1998), but the study result was still unsatisfactory for interpretation due to endogeneity. As a result, the study used the System GMM model - SGMM to overcome endogenous defects in specific as well as model problems in general (Arellano & Bond, 1991; Arellano & Bover, 1995; Blundell & Bond, 1998; McLachlan & Peel, 2004; Nguyen, 2018). Finally, the study employed an estimation method based on the R programming language and the Bootstrap technique to assess the impact of all micro and macro variables on joint stock commercial banks’ liquidity risk in Vietnam from 2008 to 2018.

4. Results and Discussion

4.1. Descriptive Statistics

The selected regression model showed no major multicollinearity problem, according to the correlation matrix (Table 2 & 3), because the correlation coefficients had the greatest value of 0.79, which was still less than 0.8 (Farrar & Glauber, 1967).

Table 2: Descriptive Statistical Parameters

Table 3: Correlation Matrix Among Variables in the Study Model

4.2. Regression Results and Discussion

According to the study result estimated by the SGMM method (Table 4), the study gave the following comments:

Table 4: Effect of Factors on Liquidity Risk

Note: statistics t in parentheses [ ]; * p < 0.1; ** p < 0.05; *** p < 0.01. Significant at the 0.05 level

Firstly, the ratio of customer deposit to total assets (DEPO) had a negative effect on liquidity risk. The study result showed that commercial banks with good deposit mobilization capacity would create a buffer against liquidity risk in business activities. This result was in contrast to the experimental result of Shah (2018), Assfaw (2019), and Mahmood et al. (2019) when arguing that according to the financial intermediary function of commercial banks, the greater the deposit mobilization capacity was, the higher the ratio, the more commercial banks promoted capital use operations for-profit purpose, credit growth and this made commercial banks limit the reserves of liquid assets, thereby leading to a decrease in the liquidity of commercial banks.

Secondly, the loan-to-asset (LTA) ratio of banks had a positive effect on liquidity risk in accordance with commercial lending theory. The study result showed that commercial banks with high credit ratios constantly faced liquidity risks in their business activities (Truong, 2013; Truong & Pham, 2014). Conventional loans in the face of large and unpredictable withdrawals of customers could lead to the loss of liquidity of commercial banks (Bonin et al., 2008).

Thirdly, the liquidity of the commercial banking system had a positive relation to liquidity risk. The higher the liquidity was, the higher liquidity risk commercial banks often faced, this result was similar to the study result of Aspachs et al. (2005).

Fourthly, the credit growth ratio (CRD) is positively covariant to liquidity risk. The study result once again confirmed the role and importance of credit growth factors, so it was necessary to be cautious to avoid liquidity risk. Indeed, the Vietnamese commercial banking system still mainly relied on income from credit activities to evaluate business performance (Nguyen, 2020). From a macro perspective, this came from the characteristics of the Vietnamese economy with economic growth mainly relying on money pumps (Pham, 2019). As a result, Vietnam’s debt- to-GDP ratio (or level of financial leverage) in recent years had always been high, specifically in the 2011–2015 period, it was approximately 1, but in the 2016–2019 period, it was 1.3 times - an increase of 28% (Pham, 2019). Along with the operating model of the SBV under the Government, economic growth was a key task that the Government requires the SBV to support, resulting in the fact that commercial banks increased their disbursement to the economy. This was not only because of the business performance of commercial banks but also the task that the commercial banking system must meet under the requirements of the SBV as the case may be, therefore, liquidity risk was unavoidable.

Fifthly, the external financing ratio of commercial banks had a positive effect on liquidity risk. This study result was consistent with the study results of Chung-Hua Shen et al. (2009) and Truong (2013). The study showed that commercial banks had a high external financing ratio, which meant that a low equity ratio in the capital structure often put pressure on the liquidity risk of commercial banks (Vodová, 2013). Moreover, the fact that commercial banks borrowed from outside to meet the withdrawal needs of depositors could increase the debt-to-equity ratio, thereby affecting the bank’s efforts to maintain an optimal capital structure (Arif & Anees, 2012). Meanwhile, commercial banks with a high equity ratio were considered safe, avoiding liquidity risk and creating trust with customers. At the same time, these commercial banks had good advantages and resources to provide more financial services for customers, helping improve profitability (Mercieca et al., 2007; Stiroh & Rumble, 2006; Le & Pham, 2017; Nguyen, 2020). However, in terms of bank governance, a high equity-to-total asset ratio was not necessarily a good thing, showing that the bank operator was being too cautious in management and ignoring profitable investment opportunities based on leveraged instruments.

Sixthly, the loan loss provision (LLP) ratio had a positive effect on LR. LLP represented a bank’s level of credit risk. The higher the cost of LPP was, the higher the liquidity risk was (Chung-Hua Shen et al., 2009). Finally, the lagged variable of liquidity risk had a positive effect on variable LR as well as macro variables including money supply M2 had no statistical significance similar to the study result of Truong (2013).

Finally, NNII has a negative effect on the risk of bank failure. This means the bank is paying out more in interest on its liabilities than its generating from its investments (Fiordelisi & Mare, 2013). These findings are consistent with the empirical work of Dermine and Carvalho (2005), Tang and Yan (2007), Koutsomanoli-Filippaki and Mamatzakis (2009), Bolton and Jeanne (2011), and Shakatreh (2020).

4.3. Testing Stability through Bootstrapping Technique

The study results (Tables 5 & 6 and Figure 1) showed that bank size had an effect on liquidity risk (Valla et al., 2006; Truong, 2013). Study results also confirm nonlinear relation between liquidity risk and bank size as follows:

\(\mathrm{LIQR}_{i, t}=\beta_{0}+\beta_{1} * \mathrm{SIZE}_{i, t}+\beta_{2}{ }^{*} \mathrm{SIZE}_{i, t}^{2}+\beta_{3} * \mathrm{SIZE}_{i, t}^{3}+e_{i, t}\)

Table 5: Estimated Study Result

Table 6: Linear Relation LIQR & SIZE and Non-Linear Relation LIQR & SIZE^2; LIQR & SIZE^3

Figure 1: Correlation Between LIQR & SIZE

This result was consistent with the theory of total asset size, showing that the effect of the bank size variable (SIZE) on LR has a nonlinear form (U-shaped graph, consistent with signaling theory (Spence, 1973) and the Too big to fail theory (Greg, 2009). This reiterated that the size of commercial banks served as a risk buffer when banks experienced liquidity shocks, but if the size of commercial banks exceeded a certain level, LR would increase. Bank capital had a positive effect on LR, this was consistent with the shiftability theory, banks with bigger capital tended to have less liquidity reserves and higher LR and vice versa.

5. Conclusion

With theoretical frameworks and domestic and international empirical evidence, the study verifies the approach’s applicability. The study’s findings reveal that the customer deposit-to-total-assets ratio (DEPO) has a negative impact on liquidity risk. In addition, the loan-to- asset (LTA) ratio, commercial bank liquidity (LIQ), credit development (CRD) ratio, external funding (EFD) ratio, and credit loss provision (LLP) ratio all have a positive impact on liquidity risk. The study’s findings focus on commercial banks’ internal elements, and there is no empirical evidence that macro variables (inflation, money supply M2, economic growth GDP, or financial crises) affect liquidity risk. The results of the study also show that the lagged variable has an impact on LR. Finally, in accordance with the theoretical framework, the study provides empirical evidence on the nonlinear correlation and U-shaped graph between the size of commercial banks and LR. The function of commercial bank size in absorbing and moderating the effects of liquidity shocks is demonstrated, however, excessive growth in commercial bank size would also increase liquidity risk in commercial bank operations. As a result, the SBV should keep a close eye on the capital increase roadmap and the size of commercial banks to sustainably improve quality and business performance. Furthermore, the study is still limited since it lacks empirical evidence on the macroeconomic impact on liquidity risk as well as the impact of business performance on liquidity risk.