The impacts of funding liquidity risk, liquidity risk and credit risk on risk-taking in banking: Evidence from an emerging market

Abstract

This study aims to investigate the impacts of funding liquidity risk, liquidity risk, and credit risk on risk-taking in banking by analyzing evidence from an emerging market. We utilize a sample of Vietnamese commercial banks for the 2010-2020 period to analyze these relationships. The fixed effects model and random effects model are used for panel data analysis in this study. Based on the Hausman test’s result, the fixed effects model is preferred. We also test for the presence of the multicollinearity, heteroskedasticity and autocorrelation in the estimation of the model. The test results indicate that the multicollinearity is not an issue, but there is strong evidence for the presence of heteroskedasticity and autocorrelation problems in the research model. To overcome these problems and improve the estimation efficiency, we finally employ the fixed effects model incorporating Driscoll and Kraay standard errors. The final empirical results for the analysis are therefore based on this model. The results show that funding liquidity risk and credit risk have an impact on banks’ risk-taking but in opposite directions. In particular, a significant and negative effect of funding liquidity risk on banks’ risk-taking indicates that banks with lower funding liquidity risk are more likely to take greater risks, whereas credit risk has a substantial positive effect on banks’ risk-taking, suggesting that an increase in credit risk leads to higher risk-taking activities of banks. Nevertheless, we do not find empirical statistical evidence to confirm the impact of liquidity risk on banks’ risk-taking behavior in Vietnam. These results provide bank managers with more insights into the understanding of risk management in banks and offer several valuable implications for practitioners as well as policymakers.