Cost efficiency and the relationships with risks in Vietnamese banking industry

The issues related to the efficiency and risk management of the financial system has been a particular focus of regulators since the global financial crisis. Vietnamese commercial banks found it difficult to manage their outputs, input prices and control their performance in terms of cost efficiency, especially after financial crisis in 2008. In addition, the Vietnamese Government is trying to rank and force the banks to abide by the requirements of Basle 3 however Vietnamese banks generally lack the quantitative tools to perform such evaluations. This research is conducted to measure the efficiency of Vietnamese banks by applying Stochastic Frontier Approach (SFA). Previous studies conducted on banking in Vietnam did not allow for the effects of risks (credit risk, operational risk, and liquidity risk) on banks’ cost efficiency. This research performs such an analysis by employing an unbalanced panel data set (mostly taken from Bankscope) of Vietnamese commercial banks covering 2006 -2012, the empirical results show the cost efficiency scores of banks and the effects of risks on those scores. The results indicate a difference in means of efficiency scores between groups of bank in terms of ownerships. The second stage of this study focuses on three kinds of risk, including credit, operational, and liquidity risk; and their impacts on cost efficiency. Our research finds there are differences on the cost efficiency with respect to the type of risk; essentially while credit risk and operational risk have positive effects on cost efficiency, liquidity risk has a negative effect. This study also found varying impacts of risks on cost efficiency between groups of bank. In addition, the results of this paper confirmed a negative effect of a special event – the global financial crisis – on cost efficiency. The findings will have implications for bankers in managing their cost efficiency and Government in building quantitative tools to control the banking system