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Dang, V., Nguyen, H. Does Diversification Protect Bank Lending Against Uncertainty?. Credit and Capital Markets – Kredit und Kapital, 55(3), 349-379. https://doi.org/10.3790/ccm.55.3.349
Dang, Van Dan and Nguyen, Hoang Chung "Does Diversification Protect Bank Lending Against Uncertainty?" Credit and Capital Markets – Kredit und Kapital 55.3, 2022, 349-379. https://doi.org/10.3790/ccm.55.3.349
Dang, Van Dan/Nguyen, Hoang Chung (2022): Does Diversification Protect Bank Lending Against Uncertainty?, in: Credit and Capital Markets – Kredit und Kapital, vol. 55, iss. 3, 349-379, [online] https://doi.org/10.3790/ccm.55.3.349
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Does Diversification Protect Bank Lending Against Uncertainty?

Dang, Van Dan | Nguyen, Hoang Chung

Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 3 : pp. 349–379

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.55.3.349
Language
English
Pages
31
Keywords

Author Details

Assoc. Prof. Dr. Van Dan Dang, Department of Finance, Banking University of Ho Chi Minh City. Address: 36 Ton That Dam Street, Nguyen Thai Binh Ward, District 1, Ho Chi Minh City, Vietnam. ORCID: https://orcid.org/0000-0001-5524-8765.

Corresponding author. Dr. Hoang Chung Nguyen, Department of Finance and Banking, Business School, Thu Dau Mot University. Address: 06 Tran Van On Street, Phu Hoa Ward, Thu Dau Mot City, Binh Duong Province, Vietnam. ORCID: https://orcid.org/0000-0002-4067-0434.

References

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  4. Ashraf, B. N./Shen, Y. (2019): Economic policy uncertainty and banks’ loan pricing, Journal of Financial Stability, Vol. 44, available at: https://doi.org/10.1016/j.jfs.2019.100695.  Google Scholar
  5. Beck, T./De Jonghe, O. (2013): Lending concentration, bank performance and systemic risk: Exploring cross-country variation, World Bank Policy Research Working Paper, available at: https://doi.org/10.1596/1813-9450-6604.  Google Scholar
  6. Berger, A. N./Guedhami, O./Kim, H. H./Li, X. (2020): Economic policy uncertainty and bank liquidity hoarding, Journal of Financial Intermediation, Vol. 49, available at: https://doi.org/10.1016/j.jfi.2020.100893.  Google Scholar
  7. Berrospide, J. M./Edge, R. M. (2010): The effects of bank capital on lending: What do we know, and what does it mean?, International Journal of Central Banking, Vol. 6(4), 5–54.  Google Scholar
  8. Bilgin, M. H./Danisman, G. O./Demir, E./Tarazi, A. (2021): Bank credit in uncertain times: Islamic vs. conventional banks, Finance Research Letters, Vol. 39, available at: https://doi.org/10.1016/j.frl.2020.101563.  Google Scholar
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  12. Bruno, G. S. F. (2005): Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals, Stata Journal, Vol. 5(4), 473–500.  Google Scholar
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  14. Caglayan, M./Xu, B. (2019): Economic policy uncertainty effects on credit and stability of financial institutions, Bulletin of Economic Research, Vol. 71(3), 342–347.  Google Scholar
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  16. Dahir, A. M./Mahat, F./Razak, N. H. A./Bany-Ariffin, A.N. (2019): Capital, funding liquidity, and bank lending in emerging economies: An application of the LSDVC approach, Borsa Istanbul Review, Vol. 19(2), 139–148.  Google Scholar
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  22. Danisman, G. O./Ersan, O./Demir, E. (2020): Economic policy uncertainty and bank credit growth: Evidence from European banks, Journal of Multinational Financial Management, Vol. 57–58, available at: https://doi.org/10.1016/j.mulfin.2020.100653.  Google Scholar
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  28. Gallo, J. G./Apilado, V. P./Kolari, J. W. (1996): Commercial bank mutual fund activities: Implications for bank risk and profitability, Journal of Banking and Finance, Vol. 20(10), 1775–1791.  Google Scholar
  29. Gambacorta, L./Mistrulli, P. E. (2004): Does bank capital affect lending behavior?, Journal of Financial Intermediation, Vol. 13(4), 436–457.  Google Scholar
  30. Gambacorta, L./Scatigna, M./Yang, J. (2014): Diversification and bank profitability: A nonlinear approach, Applied Economics Letters, Vol. 21(6), 438–441.  Google Scholar
  31. Gennaioli, N./Martin, A./Rossi, S. (2014): Sovereign default, domestic banks, and financial institutions, Journal of Finance, Vol. 69(2), 819–866.  Google Scholar
  32. Guerry, N./Wallmeier, M. (2017): Valuation of diversified banks: New evidence, Journal of Banking and Finance, Vol. 80, 203–214.  Google Scholar
  33. Hartzmark, S. M. (2016): Economic uncertainty and interest rates, Review of Asset Pricing Studies, Vol. 6(2), 179–220.  Google Scholar
  34. He, Z./Niu, J. (2018): The effect of economic policy uncertainty on bank valuations, Applied Economics Letters, Vol. 25(5), 345–347.  Google Scholar
  35. Hoechle, D. (2007): Robust standard errors for panel regressions with cross-sectional dependence, Stata Journal, Vol. 7(3), 281–312.  Google Scholar
  36. Hu, S./Gong, D. (2019): Economic policy uncertainty, prudential regulation and bank lending, Finance Research Letters, Vol. 29, 373–378.  Google Scholar
  37. Huynh, J./Dang, V. D. (2021): Loan portfolio diversification and bank returns: Do business models and market power matter?, Cogent Economics and Finance, Vol. 9(1), available at: https://doi.org/10.1080/23322039.2021.1891709.  Google Scholar
  38. Kashyap, A. K./Stein, J. C. (2000): What do a million observations on banks say about the transmission of monetary policy?, American Economic Review, Vol. 90(3), 407–428.  Google Scholar
  39. Kishan, R. P./Opiela, T. P. (2000): Bank size, bank capital, and the bank lending channel, Journal of Money, Credit and Banking, Vol. 32(1), 121–141.  Google Scholar
  40. Köhler, M. (2015): Which banks are more risky? The impact of business models on bank stability, Journal of Financial Stability, Vol. 16, 195–212.  Google Scholar
  41. Lambert, C./Noth, F./Schüwer, U. (2017): How do insured deposits affect bank risk? Evidence from the 2008 Emergency Economic Stabilization Act, Journal of Financial Intermediation, Vol. 29, 81–102.  Google Scholar
  42. Meslier, C./Tacneng, R./Tarazi, A. (2014): Is bank income diversification beneficial? Evidence from an emerging economy, Journal of International Financial Markets, Institutions and Money, Vol. 31(1), 97–126.  Google Scholar
  43. Mishkin, F. S. (1999): Financial consolidation: Dangers and opportunities, Journal of Banking and Finance, Vol. 23(2), 675–691.  Google Scholar
  44. Ng, J./Saffar, W./Zhang, J. J. (2020): Policy uncertainty and loan loss provisions in the banking industry, Review of Accounting Studies, Vol. 25(2), 726–777.  Google Scholar
  45. Nguyen, T. P. T./Nghiem, S. H./Roca, E./Sharma, P. (2016): Bank reforms and efficiency in Vietnamese banks: evidence based on SFA and DEA, Applied Economics, Vol. 48(30), 2822–2835.  Google Scholar
  46. Phan, D. H. B./Iyke, B. N./Sharma, S. S./Affandi, Y. (2021): Economic policy uncertainty and financial stability – Is there a relation?, Economic Modelling, Vol. 94, 1018–1029.  Google Scholar
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  49. Rossi, S. P. S./Schwaiger, M. S./Winkler, G. (2009): How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks, Journal of Banking and Finance, Vol. 33(12), 2218–2226.  Google Scholar
  50. Sáiz, M. C./Azofra, S. S./Olmo, B. T./Gutiérrez, C. L. (2018): A new approach to the analysis of monetary policy transmission through bank capital, Finance Research Letters, Vol. 24, 199–220.  Google Scholar
  51. Shim, J. (2013): Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification, Journal of Banking and Finance, Vol. 37(3), 761–772.  Google Scholar
  52. Shim, J. (2019): Loan portfolio diversification, market structure and bank stability, Journal of Banking and Finance, Vol. 104, 103–115.  Google Scholar
  53. Simoens, M./Vander, R. (2021): Does diversification protect European banks’ market valuations in a pandemic?, Finance Research Letters, available at: https://doi.org/10.1016/j.frl.2021.102093.  Google Scholar
  54. Tabak, B. M./Fazio, D. M./Cajueiro, D. O. (2011): The effects of loan portfolio concentration on Brazilian banks’ return and risk, Journal of Banking and Finance, Vol. 35(11), 3065–3076.  Google Scholar
  55. Tang, D. Y./Yan, H. (2010): Market conditions, default risk and credit spreads, Journal of Banking and Finance, Vol. 34(4), 743–753.  Google Scholar
  56. Valencia, F. (2017): Aggregate uncertainty and the supply of credit, Journal of Banking and Finance, Vol. 81, 150–165.  Google Scholar
  57. Vo, X. V. (2018): Bank lending behavior in emerging markets, Finance Research Letters, Vol. 27, 129–134.  Google Scholar
  58. Wang, Y./Wang, K./Chang, C. P. (2019): The impacts of economic sanctions on exchange rate volatility, Economic Modelling, Vol. 82, 58–65.  Google Scholar
  59. Williams, B. (2016): The impact of non-interest income on bank risk in Australia, Journal of Banking and Finance, Vol. 73, 16–37.  Google Scholar
  60. Wu, J./Yao, Y./Chen, M./Jeon, B. N. (2020): Economic uncertainty and bank risk: Evidence from emerging economies, Journal of International Financial Markets, Institutions and Money, Vol. 68, available at: https://doi.org/10.1016/j.intfin.2020.101242.  Google Scholar
  61. Acharya, V. V./Hasan, I./Saunders, A. (2006): Should banks be diversified? Evidence from individual bank loan portfolios, Journal of Business, Vol. 79(3), 1355–1412.  Google Scholar
  62. Allen, F./Gale, D. (2004): Competition and financial stability, Journal of Money, Credit, and Banking, Vol. 36(3b), 453–480.  Google Scholar
  63. Altunbas, Y./Gambacorta, L./Marques-Ibanez, D. (2010): Bank risk and monetary policy, Journal of Financial Stability, Vol. 6(3), 121–129.  Google Scholar
  64. Ashraf, B. N./Shen, Y. (2019): Economic policy uncertainty and banks’ loan pricing, Journal of Financial Stability, Vol. 44, available at: https://doi.org/10.1016/j.jfs.2019.100695.  Google Scholar
  65. Beck, T./De Jonghe, O. (2013): Lending concentration, bank performance and systemic risk: Exploring cross-country variation, World Bank Policy Research Working Paper, available at: https://doi.org/10.1596/1813-9450-6604.  Google Scholar
  66. Berger, A. N./Guedhami, O./Kim, H. H./Li, X. (2020): Economic policy uncertainty and bank liquidity hoarding, Journal of Financial Intermediation, Vol. 49, available at: https://doi.org/10.1016/j.jfi.2020.100893.  Google Scholar
  67. Berrospide, J. M./Edge, R. M. (2010): The effects of bank capital on lending: What do we know, and what does it mean?, International Journal of Central Banking, Vol. 6(4), 5–54.  Google Scholar
  68. Bilgin, M. H./Danisman, G. O./Demir, E./Tarazi, A. (2021): Bank credit in uncertain times: Islamic vs. conventional banks, Finance Research Letters, Vol. 39, available at: https://doi.org/10.1016/j.frl.2020.101563.  Google Scholar
  69. Bloom, N. (2009): The impact of uncertainty shocks, Econometrica, Vol. 77(3), 623–685.  Google Scholar
  70. Blundell, R./Bond, S. (1998): Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics, Vol. 87(1), 115–143.  Google Scholar
  71. Bordo, M. D./Duca, J. V./Koch, C. (2016): Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades, Journal of Financial Stability, Vol. 26, 90–106.  Google Scholar
  72. Bruno, G. S. F. (2005): Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals, Stata Journal, Vol. 5(4), 473–500.  Google Scholar
  73. Buch, C. M./Buchholz, M./Tonzer, L. (2015): Uncertainty, bank lending, and bank-level heterogeneity, IMF Economic Review, Vol. 63(4), 919–954.  Google Scholar
  74. Caglayan, M./Xu, B. (2019): Economic policy uncertainty effects on credit and stability of financial institutions, Bulletin of Economic Research, Vol. 71(3), 342–347.  Google Scholar
  75. Chi, Q./Li, W. (2017): Economic policy uncertainty, credit risks and banks’ lending decisions: Evidence from Chinese commercial banks, China Journal of Accounting Research, Vol. 10(1), 33–50.  Google Scholar
  76. Dahir, A. M./Mahat, F./Razak, N. H. A./Bany-Ariffin, A.N. (2019): Capital, funding liquidity, and bank lending in emerging economies: An application of the LSDVC approach, Borsa Istanbul Review, Vol. 19(2), 139–148.  Google Scholar
  77. Dang, V. D. (2020): Do non-traditional banking activities reduce bank liquidity creation? Evidence from Vietnam, Research in International Business and Finance, Vol. 54, available at: https://doi.org/10.1016/j.ribaf.2020.101257.  Google Scholar
  78. Dang, V. D./Dang, V. C. (2020): The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime, Research in International Business and Finance, Vol. 54, available at: https://doi.org/10.1016/j.ribaf.2020.101301.  Google Scholar
  79. Dang, V. D./Dang, V. C. (2021): Bank diversification and the effectiveness of monetary policy transmission: Evidence from the bank lending channel in Vietnam, Cogent Economics and Finance, Vol. 9(1), available at: https://doi.org/10.1080/23322039.2021.1885204.  Google Scholar
  80. Dang, V. D./Huynh, J. (2022): Bank funding, market power, and the bank liquidity creation channel of monetary policy, Research in International Business and Finance, Vol. 59, available at: https://doi.org/10.1016/J.RIBAF.2021.101531.  Google Scholar
  81. Danisman, G. O./Demir, E./Ozili, P. (2021): Loan loss provisioning of US banks: Economic policy uncertainty and discretionary behavior, International Review of Economics and Finance, Vol. 71, 923–935.  Google Scholar
  82. Danisman, G. O./Ersan, O./Demir, E. (2020): Economic policy uncertainty and bank credit growth: Evidence from European banks, Journal of Multinational Financial Management, Vol. 57–58, available at: https://doi.org/10.1016/j.mulfin.2020.100653.  Google Scholar
  83. Dell’Ariccia, G./Laeven, L./Marquez, R. (2014): Real interest rates, leverage, and bank risk-taking, Journal of Economic Theory, Vol. 149(1), 65–99.  Google Scholar
  84. Denis, D. J./Denis, D. K./Sarin, A. (1997): Agency problems, equity ownership, and corporate diversification, Journal of Finance, Vol. 52(1), 135–160.  Google Scholar
  85. DeYoung, R./Rice, T. (2004): Noninterest income and financial performance at U.S. commercial banks, Financial Review, Vol. 39(1), 101–127.  Google Scholar
  86. Diamond, D. W. (1984): Financial intermediation and delegated monitoring, The Review of Economic Studies, Vol. 51(3), 393–414.  Google Scholar
  87. Doan, A. T./Lin, K. L./Doong, S. C. (2018): What drives bank efficiency? The interaction of bank income diversification and ownership, International Review of Economics and Finance, Vol. 55, 203–219.  Google Scholar
  88. Gallo, J. G./Apilado, V. P./Kolari, J. W. (1996): Commercial bank mutual fund activities: Implications for bank risk and profitability, Journal of Banking and Finance, Vol. 20(10), 1775–1791.  Google Scholar
  89. Gambacorta, L./Mistrulli, P. E. (2004): Does bank capital affect lending behavior?, Journal of Financial Intermediation, Vol. 13(4), 436–457.  Google Scholar
  90. Gambacorta, L./Scatigna, M./Yang, J. (2014): Diversification and bank profitability: A nonlinear approach, Applied Economics Letters, Vol. 21(6), 438–441.  Google Scholar
  91. Gennaioli, N./Martin, A./Rossi, S. (2014): Sovereign default, domestic banks, and financial institutions, Journal of Finance, Vol. 69(2), 819–866.  Google Scholar
  92. Guerry, N./Wallmeier, M. (2017): Valuation of diversified banks: New evidence, Journal of Banking and Finance, Vol. 80, 203–214.  Google Scholar
  93. Hartzmark, S. M. (2016): Economic uncertainty and interest rates, Review of Asset Pricing Studies, Vol. 6(2), 179–220.  Google Scholar
  94. He, Z./Niu, J. (2018): The effect of economic policy uncertainty on bank valuations, Applied Economics Letters, Vol. 25(5), 345–347.  Google Scholar
  95. Hoechle, D. (2007): Robust standard errors for panel regressions with cross-sectional dependence, Stata Journal, Vol. 7(3), 281–312.  Google Scholar
  96. Hu, S./Gong, D. (2019): Economic policy uncertainty, prudential regulation and bank lending, Finance Research Letters, Vol. 29, 373–378.  Google Scholar
  97. Huynh, J./Dang, V. D. (2021): Loan portfolio diversification and bank returns: Do business models and market power matter?, Cogent Economics and Finance, Vol. 9(1), available at: https://doi.org/10.1080/23322039.2021.1891709.  Google Scholar
  98. Kashyap, A. K./Stein, J. C. (2000): What do a million observations on banks say about the transmission of monetary policy?, American Economic Review, Vol. 90(3), 407–428.  Google Scholar
  99. Kishan, R. P./Opiela, T. P. (2000): Bank size, bank capital, and the bank lending channel, Journal of Money, Credit and Banking, Vol. 32(1), 121–141.  Google Scholar
  100. Köhler, M. (2015): Which banks are more risky? The impact of business models on bank stability, Journal of Financial Stability, Vol. 16, 195–212.  Google Scholar
  101. Lambert, C./Noth, F./Schüwer, U. (2017): How do insured deposits affect bank risk? Evidence from the 2008 Emergency Economic Stabilization Act, Journal of Financial Intermediation, Vol. 29, 81–102.  Google Scholar
  102. Meslier, C./Tacneng, R./Tarazi, A. (2014): Is bank income diversification beneficial? Evidence from an emerging economy, Journal of International Financial Markets, Institutions and Money, Vol. 31(1), 97–126.  Google Scholar
  103. Mishkin, F. S. (1999): Financial consolidation: Dangers and opportunities, Journal of Banking and Finance, Vol. 23(2), 675–691.  Google Scholar
  104. Ng, J./Saffar, W./Zhang, J. J. (2020): Policy uncertainty and loan loss provisions in the banking industry, Review of Accounting Studies, Vol. 25(2), 726–777.  Google Scholar
  105. Nguyen, T. P. T./Nghiem, S. H./Roca, E./Sharma, P. (2016): Bank reforms and efficiency in Vietnamese banks: evidence based on SFA and DEA, Applied Economics, Vol. 48(30), 2822–2835.  Google Scholar
  106. Phan, D. H. B./Iyke, B. N./Sharma, S. S./Affandi, Y. (2021): Economic policy uncertainty and financial stability – Is there a relation?, Economic Modelling, Vol. 94, 1018–1029.  Google Scholar
  107. Pindyck, R. S. (1988): Irreversible investment, capacity choice, and the value of the firm, The American Economic Review, Vol. 78(5), 969–985.  Google Scholar
  108. Roodman, D. (2009): How to do xtabond2: An introduction to difference and system GMM in Stata, Stata Journal, Vol. 9(1), 86–136.  Google Scholar
  109. Rossi, S. P. S./Schwaiger, M. S./Winkler, G. (2009): How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks, Journal of Banking and Finance, Vol. 33(12), 2218–2226.  Google Scholar
  110. Sáiz, M. C./Azofra, S. S./Olmo, B. T./Gutiérrez, C. L. (2018): A new approach to the analysis of monetary policy transmission through bank capital, Finance Research Letters, Vol. 24, 199–220.  Google Scholar
  111. Shim, J. (2013): Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification, Journal of Banking and Finance, Vol. 37(3), 761–772.  Google Scholar
  112. Shim, J. (2019): Loan portfolio diversification, market structure and bank stability, Journal of Banking and Finance, Vol. 104, 103–115.  Google Scholar
  113. Simoens, M./Vander, R. (2021): Does diversification protect European banks’ market valuations in a pandemic?, Finance Research Letters, available at: https://doi.org/10.1016/j.frl.2021.102093.  Google Scholar
  114. Tabak, B. M./Fazio, D. M./Cajueiro, D. O. (2011): The effects of loan portfolio concentration on Brazilian banks’ return and risk, Journal of Banking and Finance, Vol. 35(11), 3065–3076.  Google Scholar
  115. Tang, D. Y./Yan, H. (2010): Market conditions, default risk and credit spreads, Journal of Banking and Finance, Vol. 34(4), 743–753.  Google Scholar
  116. Valencia, F. (2017): Aggregate uncertainty and the supply of credit, Journal of Banking and Finance, Vol. 81, 150–165.  Google Scholar
  117. Vo, X. V. (2018): Bank lending behavior in emerging markets, Finance Research Letters, Vol. 27, 129–134.  Google Scholar
  118. Wang, Y./Wang, K./Chang, C. P. (2019): The impacts of economic sanctions on exchange rate volatility, Economic Modelling, Vol. 82, 58–65.  Google Scholar
  119. Williams, B. (2016): The impact of non-interest income on bank risk in Australia, Journal of Banking and Finance, Vol. 73, 16–37.  Google Scholar
  120. Wu, J./Yao, Y./Chen, M./Jeon, B. N. (2020): Economic uncertainty and bank risk: Evidence from emerging economies, Journal of International Financial Markets, Institutions and Money, Vol. 68, available at: https://doi.org/10.1016/j.intfin.2020.101242.  Google Scholar

Abstract

The paper examines whether bank diversification in multiple dimensions can protect bank lending from uncertainty shocks. We use a panel of Vietnamese commercial banks during 2007 – 2019 for empirical analysis and measure uncertainty in banking by the dispersion of bank-level shocks. Our results confirm that banks may reduce loan growth and experience more credit risk amid greater uncertainty. These adverse impacts of uncertainty on bank lending (both quantity and quality) are significantly alleviated by bank diversification in the loan portfolio, income, and funding aspects. Our findings offer practical implications for regulators and banks themselves: bank diversification can effectively act as a lending shock absorber in periods of high uncertainty.

Table of Contents

Section Title Page Action Price
Van Dan Dang / Hoang Chung Nguyen: Does Diversification Protect Bank Lending Against Uncertainty? 349
Abstract 349
I. Introduction 349
II. Related Literature 352
1. Uncertainty and Bank Lending 352
2. The Role of Bank Diversification 353
III. Data and Methodology 355
1. Data Sources 355
2. Uncertainty and Bank Diversification Measures 355
a) Banking Uncertainty Measure 355
b) Bank Diversification Measure 356
3. Methodology 357
4. Summary Statistics of Variables 360
IV. Results 360
1. Estimation Results for Loan Growth 360
2. Estimation Results for Credit Risk 365
3. Robustness Checks 372
V. Conclusion 373
References 376

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