Bank competition and risk taking: Empirical Evidence from Vietnamese Banking Industry

This study investigates the impact of financial stability on bank competition in Vietnam taking into account the impact of foreign ownership, crisis and state ownership. Based on a data set of commercial banks in Vietnam over the period of 2005 to 2012, the empirical result indicates that under a fragmented banking structure in Vietnam, a higher degree of competition (the lower degree of market power) would induce a group of small and weak banks to undertake non-optimizing behaviours especially when being challenged by adverse economic conditions. What is most important, the study provides evidence that banks with higher degree of market power would enjoy more stability. A closer investigation taking into consideration the impact of crisis finds that bank risk taking is not fuelled by the impact of the global financial crisis (2007-2009). However, there is evidence supporting the enhancing impact of the domestic credit crisis (2010-2011) upon bank competition and bank risk taking. Foreign ownership, which is still heavily restricted in Vietnam, does not appear to have significant impact on bank stability. Meanwhile, state ownership has been found to have a stabilizing impact for banks. Overall, this study provides important implications for bank restructuring and consolidation policies in Vietnam