Impact of liquidity creation on the stability and profitability of banks: A case study of Vietnam
Date Published:
02/12/2025
Online Published:
25/11/2025
Section:
Finance, Banking, Accounting, and Auditing
Main Article Content
Abstract
Liquidity creation is a core and essential function of banks that affects their profitability and stability. This study measures the liquidity creation of Vietnamese banks during the period 2014–2023 using the comprehensive measurement approach developed by Berger and Bouwman (2009). Furthermore, the results indicate that banks that create more liquidity tend to be less stable and less profitable. The study also finds that changes in bank capital play a moderating role, weakening the impact of liquidity creation on bank stability. Based on the findings, the study emphasizes the importance of aligning bank liquidity creation with regulatory standards to enhance financial stability. In particular, banks should comply with the Basel III framework, especially the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), which are designed to limit excessive liquidity creation and reduce systemic risk. These standards require banks to maintain a sustainable structure of assets and liabilities and hold sufficient high-quality liquid assets. Given that Basel III regulations are more comprehensive and complex than previous frameworks, the successful implementation in Vietnam will require not only the commitment and capacity of individual banks, but also clear and specific guidance from the State Bank of Vietnam to ensure consistency and effectiveness in practice.
Keywords
Banks; Liquidity creation; Profitability; Stability
Article Details
Field of Economic (JEL Codes)
G20 - General - G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages - G28 - Government Policy and Regulation - Financial Institutions and Services
References
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Barth, J. R., Caprio, G., & Levine, R. (2013). Bank regulation and supervision in 180 countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111–219. https://doi.org/10.1108/17576381311329661
Ben Lahouel, B., Taleb, L., Ben Zaied, Y., & Managi, S. (2022). Financial stability, liquidity risk and income diversification: Evidence from European banks using the CAMELS–DEA approach. Annals of Operations Research. Advance online publication. https://doi.org/10.1007/s10479-022-04805-1
Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104
Berger, A. N., & Bouwman, C. H. S. (2017). Bank liquidity creation, monetary policy, and financial crises. Journal of Financial Stability, 30, 139–155. https://doi.org/10.1016/j.jfs.2017.05.001
Berger, A. N., & Sedunov, J. (2017). Bank liquidity creation and real economic output. Journal of Banking & Finance, 81, 1–19. https://doi.org/10.1016/j.jbankfin.2017.04.005
Bernanke, B. S. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. American Economic Review, 73(3), 257–276. https://www.jstor.org/stable/1808111
Bhattacharya, S., & Thakor, A. V. (1993). Contemporary banking theory. Journal of Financial Intermediation, 3(1), 2–50. https://doi.org/10.1006/jfin.1993.1001
Bordeleau, É., & Graham, C. (2010). The impact of liquidity on bank profitability. Bank of Canada Working Paper. https://www.bankofcanada.ca/wp-content/uploads/2010/12/wp10-38.pdf
Boyd, J. H., De Nicolò, G., & Jalal, A. M. (2006). Bank risk-taking and competition revisited: New theory and new evidence. IMF Working Paper No. 06/297. https://www.imf.org/external/pubs/ft/wp/2006/wp06297.pdf
Boyd, J. H., & Graham, S. L. (1986). Risk, regulation, and bank holding company expansion into nonbanking. Quarterly Review, Federal Reserve Bank of Minneapolis, 10(Spring), 2–17. https://doi.org/10.21034/qr.1021
Bryant, J. (1980). A model of reserves, bank runs, and deposit insurance. Journal of Banking & Finance, 4(4), 335–344. https://doi.org/10.1016/0378-4266(80)90012-6
Calomiris, C. W. (2007). Bank failures in theory and history: The Great Depression and other “contagious” events. NBER Working Paper No. 13597. https://doi.org/10.3386/w13597
Coval, J. D., & Thakor, A. V. (2005). Financial intermediation as a beliefs-bridge between optimists and pessimists. Journal of Financial Economics, 75(3), 535–569. https://doi.org/10.1016/j.jfineco.2004.02.005
DeYoung, R. (2003). De novo bank exit. Journal of Money, Credit and Banking, 35(5), 711–728. https://doi.org/10.1353/mcb.2003.0036
Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419. https://doi.org/10.1086/261155
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. Journal of Finance, 55(6), 2431–2465. https://doi.org/10.1111/0022-1082.00296
Diamond, D. W., & Rajan, R. G. (2001). Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of Political Economy, 109(2), 287–327. https://doi.org/10.1086/319552
Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking & Finance, 37(9), 3295–3317. https://doi.org/10.1016/j.jbankfin.2013.04.027
Duan, Y., & Niu, J. (2020). Liquidity creation and bank profitability. North American Journal of Economics and Finance, 54, 101250. https://doi.org/10.1016/j.najef.2020.101250
Fu, X., Lin, Y., & Molyneux, P. (2016). Bank capital and liquidity creation in Asia Pacific. Economic Inquiry, 54(2), 966–993. https://doi.org/10.1111/ecin.12308
Fungáčová, Z., Turk, R., & Weill, L. (2021). High liquidity creation and bank failures. Journal of Financial Stability, 57, 100936. https://doi.org/10.1016/j.jfs.2021.100937
Goddard, J., Liu, H., Molyneux, P., & Wilson, J. O. S. (2013). Do bank profits converge? European Financial Management, 19(2), 345–365. https://doi.org/10.1111/j.1468-036X.2010.00578.x
Gorton, G., & Winton, A. (2000). Liquidity provision, bank capital, and the macroeconomy. Working Paper, University of Minnesota. https://www.jstor.org/stable/44163078
Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific-Basin Finance Journal, 64, 101439. https://doi.org/10.1016/j.pacfin.2020.101439
Gupta, J., & Kashiramka, S. (2024). Examining the impact of liquidity creation on bank stability in the Asia Pacific region: Do ESG disclosures play a moderating role? Journal of International Financial Markets, Institutions and Money, 91(2), 101955. https://doi.org/10.1016/j.intfin.2024.101955
Hà Tâm. (2024, June 3). Thanh khoản “căng”, ngân hàng nhỏ cắn răng vay vốn đắt. Báo Đầu Tư. http://baodautu.vn/thanh-khoan-cang-ngan-hang-nho-can-rang-vay-von-d231249.html
Hahm, J. H., Shin, H. S., & Shin, K. (2013). Non-core bank liabilities and financial vulnerability. Journal of Money, Credit and Banking, 45(S1), 3–36. https://doi.org/10.1111/jmcb.12035
Horváth, R., Seidler, J., & Weill, L. (2014). Bank capital and liquidity creation: Granger-causality evidence. Journal of Financial Services Research, 45, 341–361. https://doi.org/10.1007/s10693-013-0164-4
Houston, J. F., Lin, C., Lin, P., & Ma, Y. (2010). Creditor rights, information sharing, and bank risk taking. Journal of Financial Economics, 96(3), 485–512. https://doi.org/10.1016/j.jfineco.2010.02.008
Kashyap, A. K., Rajan, R., & Stein, J. C. (2002). Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance, 57(1), 33–73. https://doi.org/10.1111/1540-6261.00415
Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259–275. https://doi.org/10.1016/j.jfineco.2008.09.003
Maroun, G., & Fromentin, V. (2024). Financial instability in Lebanon: Do the liquidity creation and performance of banks matter? Quarterly Review of Economics and Finance, 96, 101091. https://doi.org/10.1016/j.qref.2024.05.001
Meyer, P., & Pifer, H. (1970). Prediction of bank failures. Journal of Finance, 25(4), 853–868. https://doi.org/10.1111/j.1540-6261.1970.tb00558.x
Minh Khuê. (2024, May 6). Tiến tới xây dựng các quy định pháp lý triển khai Basel III. Thời báo Ngân hàng. https://thoibaonganhang.vn/tien-toi-xay-dung-cac-quy-dinh-phap-ly-trien-khai-basel-iii-156595.html
Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking & Finance, 16(6), 1173–1178. https://doi.org/10.1016/0378-4266(92)90065-8
Peek, J., & Rosengren, E. S. (2000). Collateral damage: Effects of the Japanese bank crisis on real activity in the United States. American Economic Review, 90(1), 30–45. https://doi.org/10.1257/aer.90.1.30
Phan, H. T., Anwar, S., Alexander, W. R. J., & Phan, H. T. M. (2019). Competition, efficiency and stability: An empirical study of East Asian commercial banks. North American Journal of Economics and Finance, 50, 100990. https://doi.org/10.1016/j.najef.2019.100990
Rolnick, A., & Weber, W. (1984). The causes of free bank failures: A detailed examination. Journal of Monetary Economics, 14(3), 267–292. https://doi.org/10.1016/0304-3932(84)90044-8
Saeed, M., Izzeldin, M., Hassan, M. K., & Pappas, V. (2020). The inter-temporal relationship between risk, capital and efficiency: The case of Islamic and conventional banks. Pacific-Basin Finance Journal, 61, 101328. https://doi.org/10.1016/j.pacfin.2020.101328
Sahyouni, A., &Wang, M. (2018). The determinants of bank profitability: Does liquidity creation matter? J. Econ. Finan. Anal., 2 (2), 61–85. https://doi.org/10.1991/jefa. v2i2.a18.
Tiêu Phong. (2023, May 3). Chuyển giao bắt buộc 4 ngân hàng bị kiểm soát đặc biệt. Thanh Niên. https://thanhnien.vn/chuyen-giao-bat-buoc-4-ngan-hang-bi-kiem-soat-dac-biet-185230503194313797.htm
Tirole, J. (2011). Illiquidity and all its friends. Journal of Economic Literature, 49(2), 287–325. https://doi.org/10.1257/jel.49.2.287
Tran, V. T., Lin, C. T., & Nguyen, H. (2016). Liquidity creation, regulatory capital, and bank profitability. International Review of Financial Analysis, 48, 98–109. https://doi.org/10.1016/j.irfa.2016.09.010
Vazquez, F., & Federico, P. (2015). Bank funding structures and risk: Evidence from the global financial crisis. Journal of Banking & Finance, 61, 1–14. https://doi.org/10.1016/j.jbankfin.2015.08.023
Vuong, T. H. G., Phan, T. T. P., Nguyen, X. C., Nguyen, M. D., & Duong, D. K. (2023). Liquidity creation and bank risk-taking: Evidence from a transition market. Heliyon, 9(8), e19141. https://doi.org/10.1016/j.heliyon.2023.e19141
Zheng, C., Cheung, A., & Cronje, T. (2019). The moderating role of capital on the relationship between bank liquidity creation and failure risk. Journal of Banking & Finance, 108, 105651. https://doi.org/10.1016/j.jbankfin.2019.105651
Allen, F., & Santomero, A. M. (1998). The theory of financial intermediation. Journal of Banking & Finance, 21(11–12), 1461–1485. https://doi.org/10.1016/S0378-4266(97)00032-0
Barth, J. R., Caprio, G., & Levine, R. (2013). Bank regulation and supervision in 180 countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111–219. https://doi.org/10.1108/17576381311329661
Ben Lahouel, B., Taleb, L., Ben Zaied, Y., & Managi, S. (2022). Financial stability, liquidity risk and income diversification: Evidence from European banks using the CAMELS–DEA approach. Annals of Operations Research. Advance online publication. https://doi.org/10.1007/s10479-022-04805-1
Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104
Berger, A. N., & Bouwman, C. H. S. (2017). Bank liquidity creation, monetary policy, and financial crises. Journal of Financial Stability, 30, 139–155. https://doi.org/10.1016/j.jfs.2017.05.001
Berger, A. N., & Sedunov, J. (2017). Bank liquidity creation and real economic output. Journal of Banking & Finance, 81, 1–19. https://doi.org/10.1016/j.jbankfin.2017.04.005
Bernanke, B. S. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. American Economic Review, 73(3), 257–276. https://www.jstor.org/stable/1808111
Bhattacharya, S., & Thakor, A. V. (1993). Contemporary banking theory. Journal of Financial Intermediation, 3(1), 2–50. https://doi.org/10.1006/jfin.1993.1001
Bordeleau, É., & Graham, C. (2010). The impact of liquidity on bank profitability. Bank of Canada Working Paper. https://www.bankofcanada.ca/wp-content/uploads/2010/12/wp10-38.pdf
Boyd, J. H., De Nicolò, G., & Jalal, A. M. (2006). Bank risk-taking and competition revisited: New theory and new evidence. IMF Working Paper No. 06/297. https://www.imf.org/external/pubs/ft/wp/2006/wp06297.pdf
Boyd, J. H., & Graham, S. L. (1986). Risk, regulation, and bank holding company expansion into nonbanking. Quarterly Review, Federal Reserve Bank of Minneapolis, 10(Spring), 2–17. https://doi.org/10.21034/qr.1021
Bryant, J. (1980). A model of reserves, bank runs, and deposit insurance. Journal of Banking & Finance, 4(4), 335–344. https://doi.org/10.1016/0378-4266(80)90012-6
Calomiris, C. W. (2007). Bank failures in theory and history: The Great Depression and other “contagious” events. NBER Working Paper No. 13597. https://doi.org/10.3386/w13597
Coval, J. D., & Thakor, A. V. (2005). Financial intermediation as a beliefs-bridge between optimists and pessimists. Journal of Financial Economics, 75(3), 535–569. https://doi.org/10.1016/j.jfineco.2004.02.005
DeYoung, R. (2003). De novo bank exit. Journal of Money, Credit and Banking, 35(5), 711–728. https://doi.org/10.1353/mcb.2003.0036
Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419. https://doi.org/10.1086/261155
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. Journal of Finance, 55(6), 2431–2465. https://doi.org/10.1111/0022-1082.00296
Diamond, D. W., & Rajan, R. G. (2001). Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of Political Economy, 109(2), 287–327. https://doi.org/10.1086/319552
Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking & Finance, 37(9), 3295–3317. https://doi.org/10.1016/j.jbankfin.2013.04.027
Duan, Y., & Niu, J. (2020). Liquidity creation and bank profitability. North American Journal of Economics and Finance, 54, 101250. https://doi.org/10.1016/j.najef.2020.101250
Fu, X., Lin, Y., & Molyneux, P. (2016). Bank capital and liquidity creation in Asia Pacific. Economic Inquiry, 54(2), 966–993. https://doi.org/10.1111/ecin.12308
Fungáčová, Z., Turk, R., & Weill, L. (2021). High liquidity creation and bank failures. Journal of Financial Stability, 57, 100936. https://doi.org/10.1016/j.jfs.2021.100937
Goddard, J., Liu, H., Molyneux, P., & Wilson, J. O. S. (2013). Do bank profits converge? European Financial Management, 19(2), 345–365. https://doi.org/10.1111/j.1468-036X.2010.00578.x
Gorton, G., & Winton, A. (2000). Liquidity provision, bank capital, and the macroeconomy. Working Paper, University of Minnesota. https://www.jstor.org/stable/44163078
Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific-Basin Finance Journal, 64, 101439. https://doi.org/10.1016/j.pacfin.2020.101439
Gupta, J., & Kashiramka, S. (2024). Examining the impact of liquidity creation on bank stability in the Asia Pacific region: Do ESG disclosures play a moderating role? Journal of International Financial Markets, Institutions and Money, 91(2), 101955. https://doi.org/10.1016/j.intfin.2024.101955
Hà Tâm. (2024, June 3). Thanh khoản “căng”, ngân hàng nhỏ cắn răng vay vốn đắt. Báo Đầu Tư. http://baodautu.vn/thanh-khoan-cang-ngan-hang-nho-can-rang-vay-von-d231249.html
Hahm, J. H., Shin, H. S., & Shin, K. (2013). Non-core bank liabilities and financial vulnerability. Journal of Money, Credit and Banking, 45(S1), 3–36. https://doi.org/10.1111/jmcb.12035
Horváth, R., Seidler, J., & Weill, L. (2014). Bank capital and liquidity creation: Granger-causality evidence. Journal of Financial Services Research, 45, 341–361. https://doi.org/10.1007/s10693-013-0164-4
Houston, J. F., Lin, C., Lin, P., & Ma, Y. (2010). Creditor rights, information sharing, and bank risk taking. Journal of Financial Economics, 96(3), 485–512. https://doi.org/10.1016/j.jfineco.2010.02.008
Kashyap, A. K., Rajan, R., & Stein, J. C. (2002). Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance, 57(1), 33–73. https://doi.org/10.1111/1540-6261.00415
Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259–275. https://doi.org/10.1016/j.jfineco.2008.09.003
Maroun, G., & Fromentin, V. (2024). Financial instability in Lebanon: Do the liquidity creation and performance of banks matter? Quarterly Review of Economics and Finance, 96, 101091. https://doi.org/10.1016/j.qref.2024.05.001
Meyer, P., & Pifer, H. (1970). Prediction of bank failures. Journal of Finance, 25(4), 853–868. https://doi.org/10.1111/j.1540-6261.1970.tb00558.x
Minh Khuê. (2024, May 6). Tiến tới xây dựng các quy định pháp lý triển khai Basel III. Thời báo Ngân hàng. https://thoibaonganhang.vn/tien-toi-xay-dung-cac-quy-dinh-phap-ly-trien-khai-basel-iii-156595.html
Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of Banking & Finance, 16(6), 1173–1178. https://doi.org/10.1016/0378-4266(92)90065-8
Peek, J., & Rosengren, E. S. (2000). Collateral damage: Effects of the Japanese bank crisis on real activity in the United States. American Economic Review, 90(1), 30–45. https://doi.org/10.1257/aer.90.1.30
Phan, H. T., Anwar, S., Alexander, W. R. J., & Phan, H. T. M. (2019). Competition, efficiency and stability: An empirical study of East Asian commercial banks. North American Journal of Economics and Finance, 50, 100990. https://doi.org/10.1016/j.najef.2019.100990
Rolnick, A., & Weber, W. (1984). The causes of free bank failures: A detailed examination. Journal of Monetary Economics, 14(3), 267–292. https://doi.org/10.1016/0304-3932(84)90044-8
Saeed, M., Izzeldin, M., Hassan, M. K., & Pappas, V. (2020). The inter-temporal relationship between risk, capital and efficiency: The case of Islamic and conventional banks. Pacific-Basin Finance Journal, 61, 101328. https://doi.org/10.1016/j.pacfin.2020.101328
Sahyouni, A., &Wang, M. (2018). The determinants of bank profitability: Does liquidity creation matter? J. Econ. Finan. Anal., 2 (2), 61–85. https://doi.org/10.1991/jefa. v2i2.a18.
Tiêu Phong. (2023, May 3). Chuyển giao bắt buộc 4 ngân hàng bị kiểm soát đặc biệt. Thanh Niên. https://thanhnien.vn/chuyen-giao-bat-buoc-4-ngan-hang-bi-kiem-soat-dac-biet-185230503194313797.htm
Tirole, J. (2011). Illiquidity and all its friends. Journal of Economic Literature, 49(2), 287–325. https://doi.org/10.1257/jel.49.2.287
Tran, V. T., Lin, C. T., & Nguyen, H. (2016). Liquidity creation, regulatory capital, and bank profitability. International Review of Financial Analysis, 48, 98–109. https://doi.org/10.1016/j.irfa.2016.09.010
Vazquez, F., & Federico, P. (2015). Bank funding structures and risk: Evidence from the global financial crisis. Journal of Banking & Finance, 61, 1–14. https://doi.org/10.1016/j.jbankfin.2015.08.023
Vuong, T. H. G., Phan, T. T. P., Nguyen, X. C., Nguyen, M. D., & Duong, D. K. (2023). Liquidity creation and bank risk-taking: Evidence from a transition market. Heliyon, 9(8), e19141. https://doi.org/10.1016/j.heliyon.2023.e19141
Zheng, C., Cheung, A., & Cronje, T. (2019). The moderating role of capital on the relationship between bank liquidity creation and failure risk. Journal of Banking & Finance, 108, 105651. https://doi.org/10.1016/j.jbankfin.2019.105651
How to Cite
Phan, T. H. (2025). Impact of liquidity creation on the stability and profitability of banks: A case study of Vietnam. Journal of Finance - Marketing Research, 3(4), 143-158. https://doi.org/10.52932/jfmr.v3i4en.984