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

This study contributes to the banking literature by examining the effect of bank liquidity creation on bank risk-taking behaviors in Vietnam - a transition economy. Our data sample comprises 367 observations of 33 Vietnamese commercial banks from 2009 to 2020. We employ the Bias-corrected Least-Squares with Dummy Variables (LSDVC) estimation, which performs better than other dynamic estimators in small and unbalanced panel samples. In this research, bank risk primarily represents non-performing loans (NPLs). Empirical results show that bank liquidity creation significantly reduces NPLs. Otherwise, bank funding diversification significantly increases NPLs in Vietnamese commercial banks. Our findings are robust to alternative measurements of liquidity creation and bank risk. Additionally, we show the moderating role of bank scale in the effects of liquidity creation and funding diversification on bank risk-taking in Vietnamese banks. Our paper is the first research investigating the influence of liquidity creation on bank risk-taking in the specified situation of a transition economy. Besides, it provides empirical evidence to fill the existing research gap. Further, this study provides a list of implications for bank managers and policymakers to manage credit risks and improve the stability of the Vietnamese banking system.