1

Contents

Chapter 1: Introduction.................................................................................................1

1.1 Introduction.............................................................................................................1

1.2 Background of the research....................................................................................1

1.1.1 The background of loan and deposit in Vietnam...............................................1

1.1.2 The need of understanding motivation for setting CAR level............................2

1.3 Research aim and objectives..................................................................................4

1.4 Research structure..................................................................................................5

Chapter 2: Literature Review...........................................................................................6

2.1 Banking System in Vietnam....................................................................................6

2.1.1 Overview...........................................................................................................6

2.1.2 The banking system under the effect of Financial Crisis...................................8

2.2 Correlation between bank deposit and lending rate..............................................10

2.3 Deposit classification and bank requirement in Vietnam.......................................13

2.3.1 Type of deposit performance of commercial banks in Vietnam.......................13

2.3.2 Reason for bank capital requirement..............................................................15

2.4 Loan performance in the banking system.............................................................16

2.4.1 Different type of loans.....................................................................................16

2.5 Adjusted deposits and loan policies to defend future crisis...................................17

2.5.1 New lending rate regulations..........................................................................17

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2.5.2 Setting rule for capital adequacy ratio.............................................................17

2.5.3 Increase capital through Basel II model in Vietnam........................................19

2.5.4 The changes of Bank Capital Regulation in the Basel III................................20

Chapter 3: Methodology.................................................................................................22

3.1 Research objectives..............................................................................................23

3.2 Research method..................................................................................................23

3.3 Research design...................................................................................................24

3.4 Research method..................................................................................................25

3.5 Data collection......................................................................................................25

3.5.1 Source of data.................................................................................................25

3.5.2 Data type.........................................................................................................28

3.5.3 Sampling.........................................................................................................29

3.6 Analysis and model...............................................................................................29

3.7 Ethical issues........................................................................................................30

3.8 Limitation...............................................................................................................30

Chapter 4: Results.........................................................................................................31

4.1 Deposit and loan ratio on the bank performance..................................................31

4.1.1 Descriptive data..............................................................................................31

4.1.2 Summary output of Regression Statistics.......................................................32

4.2 Elements impact on performance of Capital Adequacy Ratio............................33

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4.2.1 Descriptive statistics.......................................................................................33

4.2.2 Summary output..............................................................................................35

Chapter 5: Discussion....................................................................................................35

5.1 The relationship between deposit and loan in term of banking operation 2000....36

5.1.1 The total amount of deposit and loan during 2008-2015.................................36

5.1.2 In term of deposit and loan ratio on the bank assets......................................39

5.2.1 the CAR level in Vietnam comparing with the global standard........................44

Chapter 6: Conclusion....................................................................................................52

Reference.......................................................................................................................56

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Abstract: There were many scholars investigating on the effectiveness of relationship

between deposit and loan performance to improve the bank revenue and reduce credit

risks (Assaf et al., 2011). However, it is the lack of study for the topic in context of

Financial Crisis. Plus, the emerging market like Vietnam with thin level of equity raised

the requirement for adapt new capital adequacy regulations. Therefore, the research

has investigated the relationship between deposit and lending rate in the context of

bank assets. At the same time, the financial indicators also took into account for

estimating the factor impacting in setting capital process.

5

Topic: the relationship between deposit and loan as well as the factors impact on the

minimum capital adequacy ratio.

Chapter 1: Introduction

1.1 Introduction

The chapter considers as the introduction segment for the dissertation, which cover the

research targets and motivations. The Financial Crisis chaos the global economic

systems by bankruptcy in different market. It directly impacted on the Vietnam economy

through different perspectives. This research focused on the strength between the

deposit and loan in the context of Global Crisis and motivated to find out the factors to

improve the level of equity capital. The beginning chapter provides introduction and the

statement for issues in light of the main objectives of the research.

1.2 Background of the research

1.1.1 The background of loan and deposit in Vietnam

Financial institution effectiveness investigations primarily consider banks as mediators

between savers and borrowers. Sealey and Lindley (1977) stated that loaning

application and other properties regard as outputs, and deposits and other debts are

treated as financial inputs. Subsequently, financial institution effectiveness

investigations concentrate on lowering the deposits adopted (input-oriented), on

increasing the offerings of loaning (output-oriented) or on both of them (non-oriented).

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For instance, overall deposits were adopted (besides labour and tangible capital) to

assess the input effectiveness of Shinkin financial institution (i.e. Japanese credit

relationships) between 2000 and 2006 (Assaf et al. 2011). Contrary, the output-oriented

effectiveness of Indian financial institutions in creating client loaning was analysed by

Fujii et al. (2014).

Therefore, Nguyen and Simioni (2015) adopted new entire loaning activities (besides

other gaining properties and inefficient loaning) to examine the output-oriented full

aspect performance of Vietnamese financial institutions alter during the 2008 – 2012

period. Notwithstanding, only a small number of these investigations have addressed

the financial institution's effectiveness under the causative correlation between loaning

application and deposits. For example, Berger and Sedunov (2017) likewise discovered

cooperative relationship between the two elements of deposit and loaning. It raised the

question about the two indications presenting to the original function of banking system,

to resolve liquidity risks and understand the concept of liquidity creation.

Adapted from previous experiences, Vietnam's economy has created positive changes

and achieved optimistic signals in socio-economic growth. The return of the banking

system with strong business growth results has contributed positively to the overall

development of the country. However, the Vietnamese banking system is also facing

challenges when facing many potential risks that could unsafe the whole system from

the uncompleted credit system and the failure of the Financial Crisis. In order to protect

the domestic financial system, the State Bank of Vietnam (SBV) apply to ensure safety

in the operation of the banking system, which involve to issues of minimum capital

adequacy ratio (CAR) through loan and deposit requirement. Moreover, expectation to

7

join international economic integration is a premise for the development of Vietnam's

financial market. From the point of view, the study focused on the application of

international standards from the establishment of Basel I and II, which is extremely

necessary for Vietnam's economy to integrate more deeply into the global financial

economy.

1.1.2 The need of understanding motivation for setting CAR level.

There was a positive change through encouraging signal in socio-economic growth of

Vietnam. The return of the banking system with strong growth in business performance

has positively contributed to the overall development of the country (Gray 2006).

However, the Vietnamese banking system is also facing challenges when faced with

many potential risks that can cause unsafety to the whole system (APRACA 2017).

Then the problem is that the Government needs to select the suitable model to ensure

the safety of the banking system. Therefore, the study and application of international

standards is extremely necessary for Vietnam's economy to integrate more deeply into

the global financial economy. International banking safety standards was practical by

the State Bank in Vietnam from the issuance of Basel I. Currently, the State Bank has

issued Circular 36 in 2014 on minimum capital adequacy ratio in ensuring the safety of

the banking system's operations. Since then, the banking operations required to achieve

the minimum capital adequacy ratio (CAR) in other to ensure the connection between

equity capital and risk-adjusted assets at over 9%. It is also an important measure to

measure the operational safety of the bank, helping the banking system in Vietnam to

withstand external and internal shocks of the economy. Statistics of the State Bank of

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Vietnam recently showed that the credit growth much faster than the equity growth rate

caused the CAR of commercial banks to decline rapidly, leading to difficulties in banking

expansion. business activities. Therefore, keeping the capital rate at a moderately high

level to ensure that the bank operates safely and business effective process is one of

the top priorities (Horakova 2012). It will not be easy to do because capital adequacy is

affected by many different factors including controllable and incontrollable issues. From

this point of view, it is necessary to practice and evaluate the factors affecting the

minimum CAR of commercial banks in Vietnam.

The purpose of the capital adequacy ratio is for commercial banks to operate stably,

limiting the commercial banks chasing profits, avoiding the increasing investment

(lending) of commercial banks in risky areas. In addition, in order to ensure the banking

system operates continuously and stably, the Basel Standard was established to

regulate operational safety issues for each commercial bank and for the whole banking

system. One of those rules is about minimum capital adequacy ratios. Baker and

Wurgler (2015). said that the correct application of capital management standards

would help commercial banks minimize the bankruptcy process and help commercial

banks operate stably. The previous study of Repullo and Suarez (2013) claimed that

banks that meet capital adequacy standards have better business performance than

banks that do not meet capital adequacy standards, which is reflected in results of

capital mobilization, credit performance and business results. In addition, Kamau and

Kariuki (2014). also supported that a good capital adequacy ratio helps commercial

banks avoid the risk of bankruptcy because they always satisfy their liquidity needs and

have the ability to grow profits in the future.

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1.3 Research aim and objectives

The financial crisis generated may difficulties for economy in the period of 2008-2015.

Therefore, it is important to find a solution for defend similar disasters in the future and

take advantages by the past experience. How banking operators could be able to

handle and performance the business smoothly during the chaos, which bring many

opportunities for the firm. Therefore, the main motivations for the research is how to

support the banking business to response with the financial damage. Since then, the

research process is to constitute and empirically examines the correlations between

loan and deposit in the financial field in Vietnam from 2008 to 2015. Three primary tasks

are described as follows:

- Verify and give new empirical proof about the correlations between loaning and

deposit in light of the financial crisis.

- Important factors could impact on the requirement level of Capital Adequacy

Ratio.

- Support Vietnamese financial institution to set new regulation for loaning and

deposits, capital requirement more efficiently.

1.4 Research structure

For the first statement, the paper uses a regression analysis method to drawn the

relationship between the loan and deposit as well as the influence of them on the bank

size. The regression model also used to scale the impact of independent variables on

the minimum CAR. The analysis results show that the lending and deposit ratio created

strong positive relationship between them as well as with the bank assets. In addition,

10

only return over equity and equity over total assets created positive relationship

correlated with the CAR performance.

The research adapted the secondary database from analyzed the factors affecting the

CAR of 44 banking operations in the period 2008 - 2015. The dataset showed factors

include Total Loans, Total Deposits, Total Deposits Ratio, Total Loans Ratio, Returns

Over Assets, Returns Over Equity, Equity Over Total Assets, Capital Adequacy Ratio are

used for inclusion in the research model. Research results show that high liquidity

assets and credit risk provisions have a positive impact on CAR. Meanwhile, bank size,

capital mobilization ratio and ROE have a negative impact on CAR. This study found no

quantitative evidence of the impact of leverage and lending rates on CAR.

Chapter 2: Literature Review

The 2007–2010 financial crisis has vividly highlighted the importance of the stability of

the banking sector and its role in providing credit for global economic activity. In the

decades prior to the credit crisis, however, most of the macroeconomic literature tended

to overlook the role of banks as a potential source of frictions in the transmission

mechanism of monetary policy (Campello et al. 2010). For example, most central banks

around the world did not regularly include the banking sector in their macroeconomic

models. There were three main reasons for this limited interest in the financial structure

from a macroeconomic perspective. Vietnam was a developing nation with developing

economy regulations and framework, which required changes to adapt with the world

financial crisis. The following contents gives the basic knowledge about the banking

system of Vietnam for a general perspective. The next part will review about the

correlation between bank deposit and lending rate. The last section regards the process

11

of changing from Basel I to Basel II of Vietnam banking institutes.

2.1 Banking System in Vietnam

2.1.1 Overview

The improvement of the financial sector in Vietnam and its operation has been analysed

by numerous investigations, consisting of market descriptions from international banking

organisation such as WB or IMF and independent scholars (Ngo 2012; Nguyen and

Simioni 2015). To be specific, Vietnamese small and medium-scale financial institutions

were not as effective as significant and extremely significant financial institutions, and

the small banks witnessed the lowest effectiveness percentages (Stewart et al. 2016).

Ngo and Tribe (2017) and Nguyen et al. (2016) also determined similar results about

large-scale banks operate more effective than small-scale due to the gap in chartered

capitals. For example, in the top 10 of largest chartered capital banks, the first one is

BIDV has three times higher capital than the SHB – the last bank in top ten (Vietnambiz

New 2020).

In addition, Vu and Nahm (2013) stated that regarding revenue effectiveness, the

financial institution in Vietnam performed would lower than the frontier in the 2000-2006

interval. From the beginning of 2006, Vietnam applied the concept of Basel II but it

faced the barriers from The Financial Ciris 2008. The failures caused a numerable

banks collapse and bankrupt, especially the bank with small charted capital and less

liquidity ratio. The Basel II reform has stopped due to the concern about the post-crisis

global reforms is the high associated costs and difficult to measure the defending

effectiveness, high chance of loss due to the failure of previous regulatory operation

12

(Dragomir 2010). However, the second reform to move forward with Basel operated in

2014 for achieving international banking standard and regulations. SBV set Basel

standards to defend incapable banks and improved financial stability through liquid

ratio, required capital, pressure endurance (Clarke 2015).

Ngo (2012) stated that because in 1990, the banking system transferred one-tier into

two-tier, the fiscal operation of banks in Vietnam has sharply enhanced when it comes

to the quantity of financial institutions, the scale of fiscal field, the number of financial

behaviour, and transactions. Until 2008, banking system in Vietnam is one of the most

grow up majors. Things have changed after the Global Financial Crisis in 2008 when

there was pressure about capital requirement for the banks. In the period of 2008 -2012,

the banking industry faced with the most difficult period with range of collapse in the

international banking system creating banking capital adequacy, market liquidity risk. It

leads to the expectation for renewal operational management and policy to strengthen

bank capital, defending future crisis.

Nevertheless, only few investigations have concentrated on the financial institutions'

effectiveness under the causative correlation between loaning and deposits (Ngo and

Tripe 2017). Thus, our research seems to be the very first experiential examination on

the specific association between the performance effectiveness of financial loaning and

deposits in Vietnam with Basel II to defend crisis. It will give clear view how developing

economy like Vietnam could recover quickly in 2014 after the crisis.

2.1.2 The banking system under the effect of Financial Crisis

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The banking crisis strongly impacted on the financial system from the relaxing interest

rate. The State Bank framed the interest rate with the combination of the refinancing

rate and discount rate in figure 1. It illustrated the strategy of the SBV in relaxing the

rate of interest ceiling when the rate before and after the Financial Crisis does not

change much in the beginning and the ending period of the Shock (Vo and Ellis 2018).

However, the interest ratio increased in the year of 2011, which created the foundation

for the raise of deposit rates in the next period. In specific, the ratio started at 7.5

percent in 2008 and increased throughout the Crisis period. In 2009, the interest rate

ceiling at 8 percent and increased to 9 percent in 2010. After that, it achieved a peak in

2015 with 15%. During the periods, the Vietnam economy strongly suffered from the

global chaos with the drop in the growth rate of major industries such as banking, real

estate, and finance.

From the point of view, the SBV did not set fixed regulations for control the deposit and

loan rate and floated it with the market trend. It created the foundation of the start of

financing rivalry between banks when the guideline focused on the interest rate

between deposit and loan at a low rate. It leads to the fails of the financial and economic

system since the crisis appeared in the year of 2008. In the segment of finance and

banking, the nature of bank resources weakened when getting firms fell into trouble

because of the reduction in salary, benefits, and FDI development (Anwar and Nguyen

2011). There were many issues including the bad debt from the commercial banks,

strict credit regulation. In which, the borrowers need to fill in the letters of credit, and

improvement process of financial stability became more difficult. Plus, the increase of

inflation and interest rate forced the local enterprise to seek foreign investment sources

14

and funding to remain business. To avoid the lack of liquidity in the local financial

market, the State Bank offers promotions to improve the economy including promoting

the interest rate discount and credit easing. By the way, the domestic credit could

improve and encourage the economy through the banking operation. To do that, the

local Government set out a specific credit improvement strategy to support the

commercial banks and local firms to continue creating and work in the troublesome

period. However, it outsourced the negative effects of the interest rate deduction and

relaxing credit policy. First of all, whether the bank could remain the high level of deposit

during the interest rate reductions. Secondly, the credit arises mostly in terms of loan

accounts, subsequent possible consequence to financial ruin. Therefore, the deposit

and loan performance in the context of Financial Disaster investigated to give a clear

perspective about the bank performance. Moreover, it also shows the impact of different

factors in the context of the capital required to promote business during a difficult

period.

2008 2009 2010 2011 2012 2013 2014 20150

2

4

6

8

10

12

14

16%

Figure 1: interest rate of Vietnam in 2008-2015.

15

Source: The State Bank of Vietnam (2020).

2.2 Correlation between bank deposit and lending rate

Having discussed the hypothetical document in term of the correlation between

loaning behaviour and deposits; thus, finding evidence and experiences of this

relationship is suitable. Numerous examinations have investigated the association

between loaning and deposits rates. Bellando and Lavigne (1992) created an

experiential analysis between deposits and loaning ratios in four EU nations which

are Germany, Great Britain, Italy and Spain. These are the nations that do not have

limitations on deposits rates. The examination adopted the Granger – causality

method. The investigation illustrated that the level of interbank competition

influences the causative feature. For instance, an extremely competitive deposit

context results in a one-way causality from deposits to loaning ratios, while an

oligopolistic practice on the deposit context impact negatively the causative

correlation that can be inverse. The circumstance of Spain illustrates that, at least

for the short term, rising competitive feature in the deposit context support the

causal relationship between deposits and loaning behaviour.

Ewing et al. (1998) described that the equilibrium increase between the deposit and

loaning rate is stable, which means that the spread goes back to its long term

balance condition, continuing a shock. Hence, if financial institutions are capable

enough, they may receive better revenues than ordinary or unusual revenues. In the

same way, Burgstaller (2005) investigated the correlation between the loaning and

deposit degrees in Austria between March 1995 and June 2003. The examination

16

adopted Granger non-causality in a vector autoregressive model. To be specific, the

analysis continued Toda and Yamamoto (1995) study by including one increasing

lag to the dynamic framework. The examination does not adopt this, it helps proper

Granger non-causality conclusion to be done in the unit-root context. The findings

illustrated that the loaning degree responds to deposit degree alterations are

unimportant for the period after the shock. Besides the forecasted feature of market

interest degrees, deposit degrees do not have that for loaning degrees. The

investigation stated that the outcomes underpin that deposits are to be verified as

the output of banks' operation proceeding. It means that it is regarded as other

findings of the output feature of deposits in financial operation.

The correlation between the loaning and deposit rate in the East of Europe was

analysed by Chang and Su (2010). In this investigation, inadequate error-correction

frameworks were evaluated to illustrate the significant changes of the loaning –

deposits increases. To be specific, the analysis adopted Enders and Siklos (2001)’s

threshold framework. The statistics utilised in this analysis are monthly examinations

on the lending rate (LR), and the 1-month affirmation of the deposit rate (DR) during

the 1998 – 2007 period. The findings show that long term non-linear cointegration

correlation between the loaning and deposit degrees exist. Similarly, Chang, Chen,

Su, Zhu and Liu (2011) employed Breitung (2001)’s non-parametric level

examination. It aims to find out if there is a long-term balance correlation among G8

nations’ loaning and deposit degrees. The investigation notably employed a

Threshold Error Correction Model (TECM) to discover if any same associations are

perceivable possibly non-linear behaviour of the loaning and deposit degrees.

17

Monthly examinations between 1998 and 2009 were adopted for these evaluations.

The outcomes demonstrated that long-term non-linear cointegration correlations

between the loaning and deposit degrees definitely exist and ultimately discover the

influential modification in G8 nations.

In case of Vietnam, the deposits created positive impact on the loan performance;

however, the loans has no influence on the implementation of the deposits (Nguyen

et al. 2018). In addition, the operational efficiency of deposit transaction is much

higher than the borrow loan, banking system needs to pay attention on managing

productivity. Moreover, the banks faced with trouble to improve quality loan and

controls the growth of non-performing loans.

2.3 Deposit classification and bank requirement in Vietnam

2.3.1 Type of deposit performance of commercial banks in Vietnam

To defend bankrupt cost for the banking institutes, the equity and deposit finance plays

important role. With the neutral risk level, the investment for equity capital creates high

expectation in the return revenue rather than into risky portfolios (Demirguc-Kunt and

Huizinga 2010). Therefore, banks with positive and strong capital ratio will be able to

decrease the change of collapse. It relates on the requirement for the level of registered

capital to secure the deposits. By the way, the capital could not use for investing in the

risky portfolios, reducing the risk of loss. For example, if the firms listed in the stock

exchange floors, they normally expected to remain good performance through ensuring

the equity capital and good revenue.

Classification of deposits in commercial banks are very important role in the operation of

18

commercial banks (Guru et al. 2002). The classification of deposits will help to manage

it more easily and take measures to mobilize more deposits depending on the purpose

of the bank's operations. There are many ways to classify deposits in commercial

banks; however, the research included the most common types in Vietnam. According

to this classification, deposits can be divided into the following three main types:

demand deposits, term deposits, and savings deposits (Pham and Riedel 2012).

Demand deposit

The concept of demand deposits is a type of deposit that is no limited

withdraw period, which means depositors have the right to cash out money at

any time (Goldstein and Pauzner 2005). Therefore, the bank listed this type of

account demand deposits, which means deposits with indefinite periods.

However, the payment function of this demand deposit depends on the

commercial bank regulation who issued it (Musser et al. 2014). If depositing

money into this account at a commercial bank has branches in other nations,

then the demand account could process the payment and cash out quickly in

foreign nations. That's why demand deposits are viewed as closest picture to

cash in all types of commercial banks. However, in developing countries,

payment by demand account is not popular because branches of commercial

banks in these countries are few and not widely spread to both remote areas

or have bad relations with other banks; moreover, the customers prefer to use

cash (Kight et al. 2004). In term of Vietnam, the deposit interest rate dropped

from 12.7% to 5% in the period of 2008-2019 (Worldbank 2020).

Term deposit

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Definition Term deposits are types of deposits entrusted to a bank that have

an agreement on the time to withdraw money between the bank and the

customer. Therefore, in principle, customers can only withdraw money when

the agreed deadline. In fact, these types of periodic deposits are not deposits

in the legal confirmation regarding to financial law as the form of a bank

deposit. However, the classification of term deposit presented as an

exception to the unusable rule, because the customer only has to refund the

deposit on the contractual maturity date. Nonetheless, if the customers wish

to get back the money before due date, it will affect the operational system of

the bank. Therefore, with such sudden withdrawal requests, the interest rate

that the bank pays for customer deposits will be very low as a form of penalty

for affecting the investment plan of the bank (Leung 2009). After the Financial

Crisis, interest rates are usually the same as those of demand deposits due to

competitive factors. In Vietnam, the most common term of deposit is 3

months, 6 months, 12 months and 18 month periods with different interest

rate (Tran et al. 2015).

Saving deposit

Feature of a deposit account in the form of savings is very diverse and

popular in the economy mobilized by commercial banks is the savings (Van

Dung et al. 2015). Even there are many deposit accounts, becoming a very

important proportion of the deposit capital in mobilized system. Specially,

demand deposit saving account with the low interest, providing the main

capital sources for the bank because it is very beneficial to lend.

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2.3.2 Reason for bank capital requirement

It highlighted the bank capital as one of the most significant elements to sustain the

banking operative structures. In the research of Miah and Uddin (2017), the high level of

capital of the bank during the decision making process, could support its to reduce

potential investment and systematic risks. When banks invested in risky assets, it is

high chance for loss the investment. In this case, the lack of equity negative influenced

the business revenues of the bank from the equity deduce. Therefore, it creates

threaten for the bank to invest in the risk assets.

Besides, if the equity ratio is not strong enough, the bank may take advantage under the

social perspective. To be specific, the banks are able to maximize the risk and

destructive investment value, which boost the return of equity for the bank through the

fee of loan borrowers and coverage for deposit amount. However, the increase of

required capital may lead to the possibility to return the loans and forces the banks to

take more hazards (Beck et al. 2010).

2.4 Loan performance in the banking system

2.4.1 Different type of loans

One of the important determinants for assessing the quality of bank assets is

nonperforming-loan (NPL). Overall banking crisis theories indicate that the negative

impact of bad loans to the economy can see at two levels. At the micro level, Berger

and Young (1997) identifies the impact of bad debt to the operation of the banking

system is that when a loan becomes overdue, the bank increased greatly increased

21

costs more to handle the problem. Karim et al. (2010) believe that these expenses do

not create value for the bank, so it is obvious that once NPL rises, the bank will

ineffectively operate. Traditionally, sustained high levels of profitability would enable the

bank to boost capital and improve its economic viability, thus negatively related to the

probability of failure. However, Ergungor & Thomson (2005) argue that this logic is

wrong, especially in the case the economy experience expansionary monetary policy

with low interest rate. Under their view, excessive monetary growth usually comes with

an increase in value of assets such as real estate, stocks, and consumer loans.

Banks respond rationally to these changes by increasing their market share because

increasing price of assets raise a good signal that profit on these markets is increasing

while risk is falling. This tendency continues until one believes that the asset prices will

continue to grow. However, as discussed by Ergungor and Thomson (2005), a long

period of rising asset prices and booming credit is probably causing highly inflationary

economy that creates strong incentive for the governments to intervene. In this

situation, higher interest rate and restriction on loan policies introduced to cool down the

economy. As a consequence, unexpected scenarios are triggered later on such as

economic growth slows down, depressing asset prices, lowering borrowers’ ability to

pay, increasing loan defaults, and eventually eroding banks’ capital.

2.5 Adjusted deposits and loan policies to defend future crisis

2.5.1 New lending rate regulations

After the financial crisis in the period of 2008-2012, Vietnam government issued new

law about the lending interest ratio with the loan relating with multiple parties. In which,

22

the decision No. 91/2014/QH13 regulated the rate for borrowing loan could not expect

20% annually (Phi et al. 2019). Previously, most of the banking institutes applied the

rate of lending in the range of 7% to 10% annually with the maximum rate roughly 14%.

However, the consumer loans will charge about 25% to 40%, which is much higher than

the Civil Code regulation. Therefore, it raised the argument about the practical

implementation for the standard lending rate under Civil Code. After that, the new rate is

adjusted by the state bank approving financial firms to set the lending rate for

consuming loan.

2.5.2 Setting rule for capital adequacy ratio

The purpose of setting regulations for deposit and loan condition is for commercial

banks to operate firmly, to limit the commercial banks to run after profits, to avoid

commercial banks to increase investment (lending) in risky areas (Clarke, 2015). In

addition, in order to ensure the continuous and stable operation of the banking system,

the Basel II regulate operational safety issues for each commercial bank and for the

whole banking system. One of those regulations is about the minimum required capital

adequacy ratio (CAR). Ivashina and Scharfstein (2010) explained that the precise

performance of capital management standards would assistance commercial banks

preserve bankrupt and upsurge liquidity ratio. Banks that meet capital adequacy

standards have better business results than banks that do not meet capital adequacy

standards, which reflected in capital mobilization results, credit operation results and

business results (Gray 2006). Likewise, Horakova (2012) believed that banks should

increase regulatory capital complying with the organisational structures and scales to

23

avoid the fasten growth extent its capacity because they always meet the liquidity needs

and are likely to grow profits in the future. Previous researches also paid attention about

financial institute adapting the concept of Capital Adequacy Ratio (CAR), which

reviewed to create pattern for Vietnam financial association. For example, the study of

Bateni et al. (2014) on factors affects CAR for the period of 2006 to 2012 indicates that

the loan ratio, ROE, ROA and equity ratio have a positive correlation with CAR. Other

research by El-Ansary and Hafez (2015) showed that factors affecting CAR have

changed before and after the financial crisis in 2008. The author collected data from 36

commercial banks in Egypt from 2003 to 2013. Results research results show that, in

the period before the crisis, factors of asset quality, bank size and profitability factor had

a statistically significant impact on CAR. After 2008, loan, deposit, liquidity, management

capacity and credit risk are the factors that have a statistically significant impact on

CAR.

2.5.3 Increase capital through Basel II model in Vietnam

International banking safety standards practical for the first time by the State Bank in

Vietnam after Basel I issued. Presently, the SBV has issued Circular 36 in 2014

referring to the minimum capital adequacy ratio in ensuring the safety of the banking

system. The minimum capital adequacy ratio is an economic indicator reflecting the

relationship between equity capital at 8% for Basel I and II only. It is also an important

measure to measure the operational safety of banks so that Vietnam's banking system

can withstand external and internal shocks of the economy. In 2016, the SBV picked up

top ten pilot banks to implement the Basel II standard. Due to the application, these

24

banks are possible to reduce up to 3 percent for CAR requirement. Specifically, the

present CAR is 10 percent, higher than 2 percent comparing with standard Basel II. May

Vietnam banks has fulfilled the requirement. For example, Vietnam Prosperity Bank,

Asia Commercial Bank has achieved the Basel II requirement. From the point of view, it

is necessary to test the listed banks have enough capital to reach the international

business standard, which supported bank operation to remain a certain level of cash to

cover operational and market risks (Barth et al. 2013). However, it raised the concern

about the capital deficit of banking systems equaling to 9% GDP to meet the

requirement capital of Basel II under Circular 13 and arise underlying deposit asset

problems (Hanoi Times 2019).

The development of the Vietnamese banking industry and its performance has been

examined by many studies, including market reports from international financial

institutions (WB or IMF) as well as individual researchers (Ngo and Tripe 2017; Stewart

et al. 2016). In particular, Stewart et al. (2016) revealed that, in Vietnam, small and

medium-sized banks were less efficient than large and very large banks, and the small

banks had the lowest efficiency ratings. Therefore, the nation has fragile economy and

easily to collapse by the affection of global crisis. Through investigating the relationship

between loan and deposit in the context of the Financial Crisis, the study will carry out

the method of sustain capital ratio through Basel II application. Since then, the banking

institute will improve the level of deposit and strength the relationship between loan and

deposit.

2.5.4 The changes of Bank Capital Regulation in the Basel III 

25

In response to the credit crisis, banks required to maintain an appropriate level and

meet specific capital requirements. There Basel Committee on Banking Supervision in

response to the financial crisis of 2007-2009 has introduced the Basel III model at the

end of 2009 (Berger et al. 2015). By then, banks require to remain the certain liquid ratio

and obtain the bank regulatory requirements. In the scale of this research, changes in

bank capital regulation focus on the improvement of the three pillars in term of reserved

capital requirements, liquidity risk ratios.

In case of revised capital requirements, the Basel I and II simplicities the capital

requirement based on risk weight of asset with a fixed ratio that leads to the trouble of

unfair to scale the risk of assets (Khwaja and Mian 2008). For example, the risk weight

of asset for big corporations equalling to the small-scale companies as long as in the

same type of assets. Basel III creates a solution by increase the minimum reserved

capital. In specific, the reserved tier I capital requires at least 6% higher than the Basel

II at 4%. The change requires the bank to hold a higher level of money and exceptional

quality to recover for unexpected events.  

The other limitation of Basel I and II are that these models concentrated on ensuring

financial institutions sustains its capital to defend risk is undertaken (Barth et al. 2013).

However, The Financial Crisis points out the liquid risk is the primary concern for The

Global Financial Crisis. At that time, banks operate rolls-over debt by short-term

financial contracts to fund activities. For example, the case of Northern Rock which the

bank relied on the short-term loan. A borrower could loan extent their financial capacity

for the short of periods. After a specific time, the bank has difficulties in rolling over the

commercial paper, leading to the financial crisis. Basel III has provided two formula to

26

scale the convertible asset within 30 days or a year in the economic disruption. By the

way, the financial institutions could improve liquidity ratio by remain stable capital to limit

the inconsistent period between assets and liabilities.

The impact of the Basel III reforms 

There are many reasons for regulatory reform, such as the financial scandal, political

pressure, commercial invention, globalisation, etc. In case of UK, The Global Financial

Crisis 2007-2009 strongly influenced the financial institutions and revealed a wide range

of restriction calling for regulatory reform. Basel III reforms have applied successfully

and considered to become a compulsory model for the multinational banking systems in

the European countries (Parise & Shenai 2018). The study of Barth et al. (2013) found

out that reforms strengthen liquidity and defending systematic risks by regulatory

frameworks. The following contents explained the role of the Basel III reforms on Bank

Capital Regulations. 

The model of Basel III has two main targets, such as extended flexibility of the bank by

strengthening bank regulatory capital and increasing liquidity ratio. The other goal

relates to remaining bank funds during the difficult financial circumstance to defend the

system risk over the business economy. In the research of McNamara et al. (2014), the

Basel III reforms built up generated regulations to minimise forecast banking systematic

risks by upgrading current regulations. Therefore, the model supports the increase the

resilience to strengthen liquidity ratio of financial institutions during the financial

pressure. In the macro effect, it helps to recover the whole bank sector by reducing

future systematic risks and specified regulations. One of another impact of Basel III

regards to its participant in redesign the balance sheet structure. The business ethical

27

issues in complying with regulations raise the question about one party taking all the

profit and passing the potential risks of rising cost for their partners. Therefore, the

reform model of Basel III will classify a specific role for the party to balance their rights

and obligations in the financial contracts. However, it raised an argument about the

impact of the Basel III framework in the Bank Capital Regulation cannot resolve

systematic and operating problems. The model could not ensure strict supervisory, only

create alliance environment for engaging nations (Schnabl 2012). It seems like the

governance structures have designed as a pattern to treat the financial system the

same way. The arrangements should custom based on the size and significance of

business enterprises to extend their investment revenue.

Chapter 3: Methodology

In this section an insight is provided in terms of the methodology that is applied in this

study, including research propositions, research design, data collection, reliability and

validity and case analysis.

3.1 Research objectives

The purpose of this study is to examine the relationship of loan and deposit in light

of the Financial Crisis. Since then, applying the CAR model to understand effectiveness

of strengthen capital could reduce the systematic risk. It also sustains the deposit

amount and attracted more loan borrowers. In order to be able to achieve this objective

and to find answers to the specific research questions raised in chapter one, the

following objectives are of interest to this study:

28

- Support Vietnamese financial institution to set new regulation for loaning and

deposits more efficiently.

- Verify and give new empirical proof about the correlations between loaning and

deposit in light of the financial crisis.

- List of factors create positive impact on the performance of CAR.

In Addition, the main hypothesizes of the paper concentrates on three main point

below:

- H1: the correlation between deposit and loan during the Financial Crisis?

- H2: the impact of deposit and loan on the bank size through total asset

value?

- H3: which factors create positive impact on the performance of CAR?

3.2 Research method

The study of Groves et al (2011) highlighted that the process of research approach

supporting the test hypothesis and answer the research questions. In the study of

Sauders and Clark (2006), there were the two main categories of the research method

including deductive and inductive approach. Particularly, the inductive method reviews

from detailed analyst to give overall perspectives and assumption. In the other hand, the

deductive approach prefers to the general information to the specific conclusion.

To prove the relationship between the loan and deposit in light of the Financial Crisis,

the report focused on test the relationship between the dependent variables such as the

total deposit ratio (DEPOSITRATIO) and the total loans ratio (LOANSRATIO) on

banking operations through the total assets ratio (ASSETRATIO). Moreover, it also

29

investigates on element affecting the CAR performance through Equity Over Total Asset

(ETA), bad debt as non-performing loans ratio (NPLRATIO), Returns Over Equity

(ROE), Returns Over Assets (ROA) (Bateni et al. 2014).

By the way, the deductive approach applied to give the general point of views then

insulting the specific conclusion. The implementation of deductive approach is suitable

to examine the connection of variables, in this case, investigating the link between

deposit and loan under the global financial crisis. Cover by the topic area, the deductive

method gives the access to prove the correlation between variables.

3.3 Research design

Research design is a plan that guides the investigator in the process of collecting,

analysing and interpreting observations. It is a logical model of proof that allows the

researcher to draw inferences concerning casual relations among the variables under

investigation (Yin 2003). Therefore, the research adopted the deductive approach to

give outer perspective reviews then particular result (Saunders et al. 2012). It explained

Jonker and Pennink (2010) that researcher and implement hypothesizes and test the

results through a research approach. It causes of the deduction method performance

unique functions such as examining the relationship between variables, therefore the

connection between the loan and deposit factors will classify. Based on the topic area,

the deductive method is going to investigate to prove the positive connection between

independent and dependent variables.

3.4 Research method

30

The segment concentrated on finding the research approach to collect different types

of data in order to analyze the relationship between variables to prove the research

topic. In the past paper of Bell (1999), the author highlighted the two main categories of

data including qualitative and quantitative types. Particularly, the application of

qualitative data matches with researches does not use the numbers such as interviews,

theoretical data and words (Saunders and Clark 2006). Besides, the quantitative

method is suitable for the case of numerous research with the data analysis function.

Regarding the topic area, the quantitative data seems like the best match to cover the

research topic including test the relationship between the deposit and loan, showing the

change in the requirement of deposit capital regulations during the Financial Crisis. By

the way, the method of quantitation utilised the relationship between the two factors

such as deposit and loan before and after the Financial Crisis. It proved by Mackey and

Gass (2015) about the benefit of quantitative research in the collection and analyses

illustrative data.

3.5 Data collection

3.5.1 Source of data

In general, two types of data sources are recognized in theory, namely primary and

secondary data. Whereas primary data is collected by the researcher itself, secondary

data already exists and the researcher is not involved in the collection of it, so the

research is analysing pre-existing data (Sachdeva 2009). Through review secondary

data of banking institutes and official global database to pick up relevant data for testing

relationship between two variables such as loan and deposits. The type of date

31

presented to the past researches, reports and reading by other authors and scholars,

which involved with the topic of the paper. Regarding to the research area, secondary

data provisions to answer the research questions and cover the objectives (Saunder et

al. 2012).

The database is extracted from “the resources for research: A Vietnamese Banking

Database” by Ngo and Le (2017). The sources of data also used in the research of Le

(2017) and Nguyen et al. (2019). From list of available data (table 1), there was 44

sampling from different types of banks in Vietnam to clarify the hypothesis of the

research during and after the Financial Crisis in the period of 2008-2015.

Table 1: List of avaiable data

Bank code 2008 2009 2010 2011 2012 2013 2014 2015

ABB 1 1 1 1 1 1 1 1

ACB 1 1 1 1 1 1 1 1

AGB 1 1 1 1 1 1 1 1

BIDV 1 1 1 1 1 1 1 1

BVB 1 1 1 1

CB 1 1 1 1

CTG 1 1 1 1 1 1 1 1

DAB 1 1 1 1 1 1 1

EIB 1 1 1 1 1 1 1 1

FCB 1 1 1

GAB 1 1 1 1 1

GPB 1 1

32

HBB 1 1 1 1

HDB 1 1 1 1 1 1 1 1

HSBC 1 1 1 1 1 1 1

IVB 1 1 1 1 1 1 1 1

KLB 1 1 1 1 1 1 1 1

LVB 1 1 1 1 1 1 1 1

MB 1 1 1 1 1 1 1 1

MDB 1 1 1 1 1 1 1

MHB 1 1 1 1 1 1 1

MSB 1 1 1 1 1 1 1 1

NAB 1 1 1 1 1 1 1 1

NCB 1 1 1 1 1 1 1 1

OB 1 1 1 1 1 1

Obs. 1 1 1 1 1 1 1 1

OCB 1 1 1 1 1 1 1 1

PGB 1 1 1 1 1 1 1 1

PNB 1 1 1 1 1 1

PVB 1 1 1

SCB 1 1 1 1 1 1 1 1

SEAB 1 1 1 1 1 1 1 1

SGB 1 1 1 1 1 1 1 1

SHB 1 1 1 1 1 1 1 1

STB 1 1 1 1 1 1 1 1

TCB 1 1 1 1 1 1 1 1

33

TNB 1 1 1

TPB 1 1 1 1 1 1 1 1

VAB 1 1 1 1 1 1 1 1

VBSP 1 1 1 1 1 1 1

VCB 1 1 1 1 1 1 1 1

VCPB 1 1 1 1 1 1 1 1

VIB 1 1 1 1 1 1 1 1

VPB 1 1 1 1 1 1 1 1

WEB 1 1 1

Grand Total 41 44 44 40 38 37 35 31

Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)

3.5.2 Data type

Since the research area concentrated on the relationship of the deposit and loan in light

of The Global Financial Crisis. It is important to use the reliable resources for the most

effective and accurate result. Therefore, the data from secondary sources conducted to

serve the purpose of the study to reflect the financial situation of the bank through the

Crisis and the adjustment for the capital requirement to secure the transaction and

avoiding economic bubbles. By the performance of the secondary database, it could

highlight the trend of growth for both variables throughout the different timing events

(Saunder et al. 2012). All of the secondary data collected from the official government

resources such as General Statistical Office and global data resources such as World

Bank and UNCTAD, etc.

34

3.5.3 Sampling

This investigation uses the pooled cross-sectional case statistics of 52 financial

institutions accommodated and practised in Vietnam between 2008 and 2015 by the

sources of the secondary data. The currency of all statistics is in VND and deflated

adopting the Consumer Price Index (CPI) derived from the database of the World Bank.

Distinct features between the accounting principles and criteria of financial institutions

may happen. This includes the Vietnamese Accounting and International Financial

Reporting Standards (IFRs and VASs); however, those distinct features are not

fundamental to this examination, because, since 2011, VASs had started to employ

IFRSs (Ngo and Tripe 2017). In general, there are up to 5 large scale banks and up to

39 smalls in the case

3.6 Analysis and model

The study of Maxwell (2012) pointed out the efficient study present clearly the data

analyst supporting to the trustable outcomes which prove the literature framework and

research objectives. Therefore, analysis process plays a vital role in the implementation

of the methodology. In scope of the thesis, the data analysis part presents to test the

relationship between the two variables such as deposit and loan. In which, the analyst

process applied the univariate analysis to the model (Creswell, 2003). The type of

analysis is to classify the strength of relationship between deposit requirement and

qualified loans before and after the Financial Crisis

3.7 Ethical issues

35

Since the secondary data will use for the research analyst, it is important to achieve the

access permission. To do that, the research requires to present the sources of

information through reference list with the public data. If the data are privacy or limited

access, the requested approval for the authors need to be attach with the research

paper. All collected data served for the purpose of this research only and not used for

other reason (Tripathy 2013). The data file required to keep in a locked folders and not

update online

3.8 Limitation

As presented above, the method of deduction and secondary data collect used in the

scale of research. It raise the concerns about the lack of updated information. In

addition, the original purpose of collecting secondary data in the first place was not for

the research area as well the conflict between different data sources may cause of the

inaccurate result. Moreover, the case of research also used the quantitative approach,

which limited the ability to expand research in case of non-numerous data. There is no

measure to test the legality of the data. Therefore, the information is less reliability and

limited to present within the topic area. The further research should include different

type of approach such as both primary and secondary data to increase the liability of the

outcome

Chapter 4: Results

After analyst the data set, this chapter listed it the key information to support the

strength of the research objectives and hypotheses. Through summary tables, the

highlighted data is going to investigate and consider.

36

4.1 Deposit and loan ratio on the bank performance

4.1.1 Descriptive data

From table 2, even the sampling collected from the same market with similar

economic conditions, it still presents the diversity of the estimating method. For

example, the range of total assets represents for the bank scale between 1.4 trillion

VND to 875 trillion VND. The size of sample is kind of wide spread with the median

at 51 trillion VND in the total asset. Regarding to the percentage of criteria, the rate

of deposit differed significantly with the scale between 3 percent to 26 percent. In

addition, the loan ratio performed similarly with the deposit rate with the scale

between 2.5 percent to 27 percent in the total value. In which, the average rate of

deposit and loan was at 2.6 percent. Moreover, the asset ratio presented the small

scale of range of 21.5 percent running between 6 percent to 22 percent. However,

the average asset ratio of the banking institutes was at 2.6, equaling the ratio of

deposit and loan.

 

DEPORATI

O

LOANRATI

O

ASSETRATI

O TASSETS

Mean 2.638 2.634 2.642 108,783,039

Standard Error 0.233 0.246 0.205 8,994,406

Median 1.161 0.977 1.411 51,121,922

Mode 2.190 1.444 2.366 -

Standard

Deviation 4.062 4.301 3.586 156,306,106

Sample 16.498 18.496 12.856 -

37

Variance

Kurtosis 8.130 8.654 5.856 7

Skewness 2.747 2.880 2.429 3

Range 25.498 26.895 21.540 873,328,185

Minimum 0.035 0.025 0.064 1,479,142

Maximum 25.533 26.921 21.604 874,807,327

Sum 804.737 803.522 805.683

32,852,477,64

8

Count 305 305 305 302

Table 2: Descriptive statistic of deposit, loan and asset variables.

Source: the author calculation

4.1.2 Summary output of Regression Statistics

From the R square test, the table 3 showed the value of 0.98, which presents the

excellent fit of the database. It explained 98 percent of the total asset variables

affected by the independent variables such as total deposits and loans ratio. If the

result of regression statistics test for R square closed to 1, the regression line

matches with the data.

Regression Statistics

Multiple R 0.988

R Square 0.976

Adjusted R

Square 0.976

Standard Error 0.557

38

Observations 305

Table 3: Summary output of the R Square test for deposit, loan and asset ratios.

Source: the author calculation.

4.2 Elements impact on performance of Capital Adequacy Ratio.

4.2.1 Descriptive statistics.

From the table 4 of descriptive statistic, the average of Deposit Ratio was at 2.60% with

the range between 0.04% to 25%. The Loan Ratio numbers achieved the minimum

value of 0.03% from TPB and the maximum number of 27% from AGB in the period of

2008-2015. In which, the average level of credit risk in Vietnam was around 53%. The

level of Return On Assets rate presented the fluctuation in between -5.99% of LVB to

5.95% of TPB, resulting the average value at 1.03% throughout the period. Regarding

to the level of Return On Equity, AGB achieved the first rank with the number of 39.20%

and the lowest performance belonging to -56.32% during the research time. The

average ratio of ROE during the research period was 9.1% with the standard deviation

of 7.92%. The Equity Over Total Assets ratio achieved its best performance at 66.07%

and its lowest one at 0.39% with the average value of 12.20%. Capital Adequacy Ratio

ranges between the lowest value of 4.8% of the VPB bank to the highest value of 18.5%

belonging to VBSP during the seven years. The variables illustrate the mean and

standard deviation at 11.52% and 3.02%, respectively.

DEPORAT LOANRAT ROA ROE ETA CAR

39

IO IO

Mean 2.638 2.634 1.039 9.108 12.209 11.520

Standard Error 0.233 0.246 0.056 0.454 0.520 0.172

Median 1.161 0.977 0.887 8.128 9.517 11.870

Mode 2.190 1.444 - - - 14.500

Standard

Deviation

4.062 4.301 0.983 7.926 9.089

3.012

Sample

Variance

16.498 18.496 0.967 62.828 82.614

9.074

Kurtosis 8.130 8.654 12.560 15.425 9.673 -0.688

Skewness 2.747 2.880 0.362 (1.056) 2.652 -0.359

Range 25.498 26.895 11.945 95.529 66.075 13.700

Minimum 0.035 0.025 (5.993) (56.326) 0.390 4.800

Maximum 25.533 26.921 5.952 39.202 66.075 18.500

Sum 804.737 803.522 316.91

3

2,777.82

9

3,723.64

1

3,513.57

1

Count 305 305 305 305 305 305

Table 4: Descriptive statistic of deposit, loan, ROA, ROE, ETA, CAR variables

4.2.2 Summary output

From the summary table, the value of R square was at 0.39, which mean the

regression line does not perfectly match with the database (table 5). The regression

statistic test does not close to 1, raising the trustable issues for the relationship

between dependent and independent variables. Therefore, the regression line could

40

not build up based on this method.

Regression Statistics

Multiple R 0.628

R Square 0.394

Adjusted R Square 0.384

Standard Error 2.364

Observations 305

Table 5: Summary output of the R Square test for CAR factors

Chapter 5: Discussion

The part includes all of the data analysis and translate it into words to further

observations and clarifications. It aims to present the understand for the data results

and significance. It helps to prove the strength of the statements, to find out

disadvantage of the results and explaining unforeseen results.

5.1 The relationship between deposit and loan in term of banking operation

5.1.1 The total amount of deposit and loan during 2008-2015

The figure 2 observed that the change in term of total deposit and loan over the 2008-

2015 period. In which, the growth rate of total deposit and loan of banking institutes in

Vietnam was slow during the Financial Crisis. It presented that the total amount of

deposit achieved around 1,2 trillion VND in 2008 and reached to 4,4 trillion VND in

41

2015, equaling to 3.8 times higher than the previous quantity. While the amount of loan

was at 1,1 trillion VND in 2008 and obtained 3.7 trillion VND in 2015, which mean 3.4

times higher in the sum of total loans.

2008 2009 2010 2011 2012 2013 2014 2015 -

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

Sum of Total Deposits Sum of Total Loans

VND billion

Figure 2: the trend of total deposit and loan in the period of 2008-2015.

Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)

In addition, the growth of the total deposits and loans achieved the best performance in

the beginning of the Crisis. The figure 3 described through the strong growth of 30%

and 42% YoY of deposits and loans in 2009, respectively. Unfortunately, both of the

ratios dropped down dramatically during the Disaster by the presentation of 10% and

12% YoY of the deposits and loans in 2011. At the end of research period, the

percentage of the two factors stably raised at 15% YoY.

From the above analyses, the total amount of deposit and loan increased together over

different periods. It supported by the research of Bellando and Lavigne (1992) about the

link of improvement between deposit and loan ratios. Moreover, the other study of

42

Ewing et al. (1998) also highlighted the balance between the total deposit and lending

rate causing of stable rate for the bank in the long term within international competition.

Therefore, if Vietnam banks has enough capacity, they could increase the higher

income through unusual revenues for the short term deposit and loan.

2008 2009 2010 2011 2012 2013 2014 20150%5%

10%15%20%25%30%35%40%45%

25%30%

32%

10%

23% 21%18%

15%

23%

42%

31%

12% 12% 14%11%

15%

YoY Deposits YoY Loans

Figure 3: the growth rate of total deposit and loan during 20087-2015.

Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)

According to investopedia (2020), Loan-to-Deposit Ratio (LDR) presented the level of

liquidity of the bank in term of total deposit and loan within certain period. Therefore, the

equation will use to illustrated the ratio of LDR throughout the research time with the

equation of:

LDR = Total loanTotaldeposit

From the figure 4, the Loan to Deposit Ratio (LDR) calculated from the total loan divided

the total deposit. Particularly, the LRD achieved 93% in 2008 and reduced to 84% in

43

2015. From the LDR, the liquidity of the bank could be explained by the difference

between the total loans and the total deposit during the same operating time. From the

case the banking institutions in Vietnam, the LDR peaked at the strongest affective

period of the Financial Crisis in the 2011 with 103%. Through that ratio, it presented the

lack of liquidity of the bank for covering unexpected events, which already happened as

the side-effect of the Financial Crisis. After that, the ratio dropped down from 94% to

84% during the post Crisis in the 2012-2015. It reflected the banks were incapable to

earn as its capacity.

Even the all of the sample data from the same market but there is diversification in scale

of estimating between banks. In which, bank size highlighted the total assets with

different scale from 1,400 billion to 874 trillion VND. However, most of the bank

appeared in the small scale with less than 10,000 billion VND in the value. The total

assets ratio distributed widely from 0.06 percent to 21.6 percent. The equity over total

deposit illustrated at high number with the average of 26.9 percent in the range between

3.4 percent to 309 percent. With the high ratio of the loan to deposit ratio, it also results

the high level of the liquidity of the liquid assets over the deposit ratio with the range

between 7.9 percent to 526.6 percent. Plus, the liquid asset over total assets valued

between 0.79 percent to 81.59 percent and achieved the average level of 30.13

percent.

In term of bad debt, different bank achieved various non-performing loans ratio running

between 0.02 percent to 91.85 percent during the period of 2008 – 2015. Regarding to

the loan loss provision ratio, the banking industry presented the rate between 0.05

44

percent to 5.1 percent over the period. The other ratios should consider including the

equity over total deposits with the value between 3.4 percent to 309.5 percent.

2008 2009 2010 2011 2012 2013 2014 201580%

85%

90%

95%

100%

105%LDR

Figure 4: LDR ratio during the research period.

Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)

5.1.2 In term of deposit and loan ratio on the bank assets

The ratio of deposit and loan over the period presented the same ratio with 2.5% in the

2008 and end with 3.33% in 2015 as shown in figure 5. During the financial crisis in

2008-2012, the total deposit and loan ratio showed the slightly improvement with only

0.2% within the four years. After that, the ratio experienced better performance by 0.6%

increasing in the period of 2012-2015. The collapse of the two ratios offered the similar

presentation of the loan and deposit growth rate during the research period. Based on

the theory of Sealey and Lindley (1977), the role of loan amount such as outputs and

45

deposit with acting as the financial inputs. Nevertheless, the financial institution focused

on reducing the input orientation and increasing the level of output through loan

accounts to improve the business revenue. However, the strongly increase and

imbalance between input-output orientation may lead to increase of non-performing

loans and lack of liquidity ratio.

2008 2009 2010 2011 2012 2013 2014 2015 -

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2.50 2.33 2.33 2.56 2.70 2.78 2.94

3.33 %

Figure 5: the deposit and loan ratio during 2008-1015.

Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)

Regression line about the link of deposit and lending ratio on the bank performance

- Significance F and P-values

In the table 6, to test the reliability of the statistically significant, the ANOVA test for the

Significance F applied. With the result of Significance F (0.000) < 0.05, which mean the

value of the set of independent variables was trustable and suitable to carry for the next

step. Moreover, all the P-values was at 0.000 presents for the Significance F outcomes

at 0.000

ANOVA

46

  df SS MS F Significance F

Regression 2.000 3814.427 1907.214 6138.541 0.000

Residual 302.000 93.830 0.311

Total 304.000 3908.257      

Coeff

icient

s

Standar

d Errort Stat

P-

value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Asset

ratio0.388 0.038 10.150 0.000 0.312 0.463 0.312 0.463

Deposit 0.466 0.035 13.328 0.000 0.397 0.535 0.397 0.535

Loan 0.389 0.033 11.759 0.000 0.324 0.454 0.324 0.454

Table 6: ANOVA test and coefficients of asset, deposit and loan ratios.

Coefficients

The regression line was y = total asset = 0.388 + 0.466*deposit + 0.389*loan.

Based on the regression equation, when there is the improvement in level of deposits or

loans at 0.466 unit and 0.389 units, total asset will raise at 0.388. It reflects the positive

relationship of the deposit and loan to enhance the bank size through the performance

of total assets.

After reviewing the model, it presented the relationship between the dependent variable

such as asset ratio and the independent ratio such as the deposit and loan ratio through

the application of regression and T-test. With the R2 level at 97.6%, resulting the

perfect fit for the regression formula. In which, there is 97.6% of the dependent value

complying with the presentation of the independent variables. As the result in the table

47

6, the variables could explain as:

- The regression outcome indicated the remarkable positive relationship between the

Asset Ratio and the Deposit Ratio. In which, when the increase of 0.46% in the

deposit ratio will lead to the improvement of 0.39% in the asset ratio. Moreover, the

p-value equals to 0.000, this leads to the effect in the asset rate at α = 0.05.

- The observed analysis illustrated the strongly positive relationship between the

Asset Ratio and the Loan Ratio. It revealed the p-value equals to 0.000 with the

significant F = 0.000 supporting to the accept of the hypothesis. It means the loan

level directly impact on the performance of asset ratio.

Correlation

- Relationship between the Deposit and Loan Ratios.

Through analyst the correlation of the deposit and loan in the context of bank size

through the asset ratio in the table 7. It reflected the strong relationship between the

two variables with the correlation at 0.97. It explained the connection between the

deposit and loan in the context of financial banking systems in Vietnam. The result

followed the research of the Chang and Su (2010) about the positive correlation

between the lending and deposit ratio in the content of Western nations. By the way,

building up the error detective system frameworks to evaluate the change in the

relationship between the loan and deposit rates will support for the bank

performance. Similarly, the empirical result also followed the study of Enders and

Siklos (2001) about the relationship between the short term lending rate and the

deposit rate. However, the theory of Enders and Siklos (2011) may appear the

disadvantage since the author conducted data from the period before the Financial

48

Crisis. Moreover, the research of Nguyen et al. (2018) showed the perfect match

with the result by the similar research period and sample size. The authors also

agreed on positive relationship between the deposit and the loan performance

throughout the Financial Crisis. However, the strong linkage between the two

variables leads to the concern about the quality loan and managing the bad debts

through the non-performing loan by the increasing of the deposit rate.

- Relationship between the Deposit and Loan Ratios on the Asset Ratio.

As shown in table 7, the correlation between the Deposit and the Loan Ratio created

strong positive impact on the performance Asset Ratio. It reflected through the

correlation rate a 0.98 for both of Deposit and Loan Ratio on the Asset rate. It

clarified that the liquidity ratio of the bank could improve through the operation of

loan performance and consumer deposits. In the research of (Berg 2012), the raise

in customer deposit leads to the progressively complying on the market fund. When

the consumer deposit could not catch up with the level of deposit, it caused of

deposit amount injected from the market assets, leading to negative impact on the

commercial strength. The market funding resources mostly come from foreign

financial enterprises, which was unstable and threaten the liquidity ration by external

impacts. It was one of the reason for the fall of the global financial institutions in the

crisis in 2008-2015 (Deltratti and Stulz 2012).

 

DEPORATI

O

LOANRATI

O

ASSETRATI

O

DEPORATIO 1

LOANRATIO 0.974 1

49

ASSETRATIO 0.982 0.981 1

Table 7: the correlation between Deposit, loan and asset ratio.

Covariance

From the table 8, it showed the level of covariance between the Deposit Ratio and Loan

Ratio reached 16.97 for the strength of relationship between the two variables. Similarly,

the Asset Ratio presented strong connection with Deposit Ratio, Loan Ratio with 14.26

and 15.07, respectively.

 

DEPORATI

O

LOANRATI

O

ASSETRATI

O

DEPORATIO 16.444

LOANRATIO 16.965 18.435

ASSETRATIO 14.260 15.074 12.814

Table 8: the covariance between Deposit, Loan and Asset Ratio.

5.2 the factors effect on the Capital Adequacy Ratio (CAR)

5.2.1 the CAR level in Vietnam comparing with the global standard.

The implementation of CAR supported business operation to understand the

relationship between equity stocks and the risks adjusted portfolios. Through the

performance of the Basel Committee, the CAR could perform accurately and security in

the context of fluctuated economy. Up to now, the CAR has internationally standardized

and become the one of the most well-known capital funding models.

In scale of figure 6, the CAR level of the Vietnam banking market always achieved

higher capital in comparing with the Basel Committee Standard for Basel II and III from

50

2008 to 2015. Specifically, the average CAR ratio of the banks in Vietnam reached

8.84% in 2008 and 11.80% in 2012 under basel II requirement, respectively. The ratio

increased in the Basel III requirement with the average level of 12.14%, 11.65% and

11.87% in 2013,2014 and 2015, respectively. Regarding to the report of National

Financial Supervisory Commission (NFSC 2016), CAR ratio dropped sharply if Basel II

was applied. According to the NFSC, the minimum capital adequacy ratio (CAR) of the

whole banking system higher than the ratio of adjusted tier 1 capital / total assets. The

results of applying Basel 2 capital adequacy standards at the 10 pilot credit institutions

showed that the CAR decreased sharply compared to the current reports, mainly due to

increased risky convertible assets. For the four state-owned commercial banks, the

reported CAR is now close to 9%. If the system applies Basel 2, this rate will drop below

8%. However, if the State commercial banks group cannot raise capital in the near

future, while ensuring a minimum CAR, it will strongly affect the credit growth plan of the

group as well as the credit growth of the whole industry. From there, it has an impact on

economic growth in the period 2016 - 2020 because this group has an important role

and a strong influence on the entire banking system.

51

2008 2009 2010 2011 2012 2013 2014 2015Basel II Basel III

02468

101214

8.84 8.7810.07

11.80 11.80 12.14 11.65 11.87

Standard Total Capital Average of CAR in Vietnam%

Figure 6: Comparison between standard CAR requirement and average CAR of

Vietnam under Basel II and III.

Source: Standard Total Capital from Biondi and Graeff (2020). Average of CAR in

Vietnam from annual financial reports.

Regression analysis about the factors impact on the CAR performance in Vietnam

- Significance F and P-values

To test the reliability of the statistically significant, the ANOVA test for the Significance F

applied. With the result of Significance F (0.000) < 0.05, which mean the value of the set

of independent variables was trustable and suitable to carry for the next step. As

presented in table 9, the p-value of ROE and ETA were at 0.000 presents for the

Significance F outcomes at 0.000. Therefore, the ROE and ETA will select to add in

formula.

ANOVA

  df SS MS F Significance F

Regressi 5. 1,087.0 217.4 38. 0.

52

on 000 91 18 897 000

Residual

299.0

00

1,671.3

04

5.

590

Total

304.0

00

2,758.3

95      

Coeffici

ents

Standa

rd Errort Stat

P-

value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

CAR 8.234 0.339 24.275 0.000 7.566 8.901 7.566 8.901

Depo

sit0.262 0.158 1.656 0.099 (0.049) 0.572 (0.049) 0.572

Loan (0.223) 0.145 (1.545) 0.123 (0.508) 0.061 (0.508) 0.061

ROA 0.432 0.321 1.347 0.179 (0.199) 1.064 (0.199) 1.064

ROE 0.144 0.037 3.846 0.000 0.070 0.218 0.070 0.218

ETA 0.117 0.024 4.892 0.000 0.070 0.163 0.070 0.163

Table 9: ANOVA test and coefficients of deposit, loan, ROA, ROE, ETA, CAR

variables.

Coefficients

The regression line was y = total asset = 8.234 + 0.144*ROE + 0.117*ETA.

Based on the regression equation, when there is the increase in term of Returns Over

Equity and Equity Over Total Assets at 0.144 unit and 0.117 units, total asset will raise at

8.234. It presented the positive relationship between the variables when it appears the

improvement in term of ROE and ETA.

53

Regarding to the equation, the connection between the independent values such as

Deposit, Loan and Returns Over Assets (ROA) and Return Over Equity (ROE) and

Equity Over Total Assets (ETA) and the dependent ratio such as Capital Adequacy Ratio

(CAR) have analysed. The R square ratio presented at 39.4%, which presented the

slight fixed of regression line with the data set. From table 7, the relationship between

variables could explain as below:

- The study outcome illustrated the negative relationship of the CAR and deposit level

through p-value 0.099 which higher than 0.005 while the significant F at 0.000. By

the case, the connection between the CAR and deposit ratio rejected through the

null hypothesis. By the way, the change of deposit amount in the banking operation

could not affect the total required capital (El-Ansary and Hafez 2015).

- In term of the Loan Ratio, there is negative connection between the Capital

Adequacy Ratio with the rate. In which, the p-value appears at 0.123, which reject by

the over 0.05. Therefore, the coefficient between the two factors was contrast.

Particularly, when the bank capital increase 8.23%, the Loan Ratio reduces at 0.22%

in the average.

- The empirical result presented the negative relationship between the CAR and the

ROA by the p-value at 0.179 is higher than the 0.05 level, therefore, the connection

between the two variables rejected. in addition, when the capital of the banking

institutions increased 8.23%, the level of Return Over Assets raised 0.43% during

the research period. It supported by the research of Phuong et al. (2019) about the

ROA creating positive impact on the capital adequacy ratio.

- The research outcome specifies the dramatically positive relationship between CAR

54

and the ROE level. The p-value equal to 0.000, which presented for the contribution

of significant F at 0.000. By the way, when the capital level increased at 8.23%,

leading to the improvement of ROE at 0.14%. it matched with the research of

(Zopounidis and Kosmidou 2008) about the positive relationship with ROE bringing

the profit for the bank performance.

- There is the strong relationship between the Capital Adequacy Ratio and the Equity

Over Total Asset level. It matched with the study result of Phuong et al. (2019) about

ETA on eventually linking with the CAR standard. In which, the increase of CAR at

8.23%, resulting the improvement of ETA at 0.12% during the period of 2008-2015.

Therefore, it reflected the strong linkage of the equity and capital level of the banking

institutions in Vietnam.

Correlation matrix

As can be seen in table 10, the adequate capital (CAR) presented the positive

relationship with all variables such as Deposit Ratio (DEPORATIO), Loan Ratio

(LOANRATIO), Returns Over Assets (ROA), and Returns Over Equity (ROE) and Equity

Over Total Assets (ETA). However, the correlation matrix between the CAR with

DEPOSIT RATIO and LOAN RATIO were at low level of 0.039 and 0.005, respectively.

It contrasts with the theory of Bateni et al. (2014) about Deposit and Loan Ratio caused

of positive relationship with the CAR. Through the correlation matrix, it highlighted that

the higher ROA and ROE, the higher CAR. In which, the correlation between CAR and

ROA, ROE resulted highly at 0.568 and 0.458, respectively. It followed the study of

Bateni et al. (2014) about the positive relationship between CAR and ROA, ROE.

  DEPORATI LOANRATI ROA ROE ETA CAR

55

O O

DEPORATIO 1

LOANRATIO 0.974 1.000

ROA -0.082 -0.092 1.000

ROE 0.341 0.303 0.686 1.000

ETA -0.342 -0.347 0.473 -0.117 1.000

CAR 0.039 0.005 0.568 0.458 0.364 1.000

Table 10: The correlation matrix of the variables.

Covariance

The covariance of CAR with other variables presented positive number, which means

the increase in CAR also lead to the gain of others in the table 11. To be specific, the

covariance between CAR with Deposit, Loan, ROA, ROE, ETA and CAR obtained 0.47,

0.06, 1.68, 10.9, 9.93 and 9.04, respectively. With all of positive results of covariance,

presenting the same direction fluctuation of the variables.

 

DEPORATI

O

LOANRATI

O ROA ROE ETA CAR

DEPORATIO 16.444

LOANRATIO 16.965 18.435

ROA -0.328 -0.387 0.964

ROE 10.938 10.310 5.326 62.622

ETA -12.598 -13.537 4.217 -8.434 82.343

CAR 0.478 0.061 1.676 10.900 9.934 9.044

Table 11: the covariance between Deposit, Loan, ROA, ROE, ETA and CAR level.

In general, the discussion part for the relationship between deposit and loan on the

56

banking operation successfully highlighted the strongly bond between variables. Even

during the Financial Crisis, the total amount and growth rate of deposit and loan

achieved optimistic performance through the difficult period. Financial institutions in

Vietnam performed efficiently with professional operational implementation by remaining

a balance level of Loan Over Deposit from 2008 to 2015 in term of deposit and loan

perspectives. Then, the relationship between the loan and deposit presented strongly

through the high level of correlation test. It reflected the replication of each factors on

the other trend. Moreover, the two independent variables including loan and deposit

created the strongly linkage with the asset ratio performance. Since then, it assumed

that the bank size and level of asset of individual banking institutions affected by the

operation of the loan and deposit amount during the implementing process. Then, the

important factors which may impact on the level of bank’s capital has investigated. In

the result, the value of Return Over Equity and Equity Over Total Assets presented the

strong impact on the level of capital requirement among the banking enterprises in

Vietnam in scale of the research.

Chapter 6: Conclusion

In conclusion, the research has investigated the key objectives and hypothesis to prove

the topic area. The main targets of the research are that the Vietnam financial

organizations are able to set suitable regulation for deposit, loan and capital to avoid the

future financial damages. The other target the relationship between the loan deposit as

well as the factors affecting on the requirement capital in the Vietnam financial field

throughout the Financial Crisis. By then, the researched conducted the secondary

databases from 44 different types of banking in Vietnam during and after the Financial

57

Crisis in 2008 to 2015 in explain the key areas and hypothesis of the study. The main

hypothesis focused on investment the correlation between deposit and loan

performance during the Global Financial Shock. The next hypothesis regarded the

impact of deposit and loan on the bank size through the rate of asset within banking

system. The last hypothesis represented the factors could bring the strong growth for

the banks through influencing on the required capital ratio.

Firstly, to prove the research aims and theories, the literature review carried out the

overview of banking industry in Vietnam and macro factors caused of the Financial

Crisis. Then, the review of previous researches about the correlation relationship

between deposit and loan elements has addressed. After that, the research found out

that the Basel Committee has issued the Basel II and III as attempt to defend the future

economic shock. Therefore, list of factors which may lead to potential influence on the

CAR performance also took into account.

Secondly, to test the hypothesis, the research conducted the secondary databases from

44 different types of banking in Vietnam during the Financial Crisis in 2008 to 2015 in

explain the key areas and hypothesis of the study. Then, it adopted the connecting

between the lending and deposit in Vietnam. After that, the factors affected on the

performance of Capital Adequacy Ratio also carried out for sustaining implemental

operation after the Financial Crisis. The results of the relationship between deposit and

lending rate with the impact on the bank size; plus, the factors contributed for the CAR

illustrated as below:

The relationship between deposit and lending rate

Both of the deposit and loan achieved strong growth rate even in the Financial Crisis.

58

However, there was concern about the LDR by the fluctuation growth of the ratio. The

analytical result revealed the lack of liquidity standard by the high ratio of LDR during

the Financial Crisis of the banking system in Vietnam. In addition, the ratio dropped

down after the Economic Shock illustrated the lack of capacity to maximum productivity.

After running hypothesis tests, the result came out that the economic deposits created

strong positive impact in the lending operation in order to improve business operation in

context of Vietnam. The regression result appeared good fit with the zero value in both

Significance F and P-value, resulting contribution for the regression line. The correlation

relationship between the deposit and loan variables was extremely solid. Moreover, it

highlighted that both of total deposit and total loan grew during the difficult financial

period in the past. The research pointed out the important in the reverse effect of loans

on deposit plays an important role to achieve the good business performance, which

focused on the customer deposits since the bank could sustain its funding and

remained wealthy level of liquidity. Based on the regression equation, it pointed out the

same trend of the deposit, loan and asset. It supported for the theory about the deposit

and loan ratio improve the bank scale through the performance of the total assets. By

the way, the liquidity rate of the bank could enhance through increasing of deposit and

loan factors. However, the strong linkage between variables could be negative when the

deposit injection came from foreign sources. It established the potential risk of liquidity

and unstable capital.

The factors impact on the level of CAR

First of all, the comparison between the international standard for Basel Il and III applied

to compare with rate of actual CAR in Vietnam. It resulted average CAR of Vietnam

59

always presented higher than the Standard Capital requirement, which reflected strong

performance of the bank to secure liquidity ratio. The growth of capital funding attributed

for the invested capital regarding to the Core Tier 1 Capital under the Circular 13 of the

State bank’s regulations. By the way, the banks could be able to limit the capital risk

management and the capacity of the adequacy capital ratio. Therefore, the higher level

of capital, the better performance which bank could achieve to hence the capital risk.

Nevertheless, the State Bank announced that the commercial banks enterprises should

not increase the level of capital in the future since it could harm the credit flows between

the banking institutions.

There were different factors brought into the analysis for presenting the relationship

between CAR with Deposit Ratio, Loan Ratio, ROA, ROE and ETA in scale of the

research area. Firstly, the level of deposit presented negative relationship with CAR.

Firstly, the data showed that deposit ratio statistically negative impact on the level of

adequate capital. It presented the limited funding resources for capital in case of

Vietnam, leading to the negative effect in the deposit performance. It may cause the

negative impact in the individual deposits by the inefficient performance the bank.

Secondly, the loan rate also appeared the negative relationship with the capital

adequacy. This factors required the bank to pay attention on the feature of capital

toward the depositors to defend collapse. Next, the other factors engaged into the

analyst which is the Return of Assets, appearing the negative relationship with the level

of capital funding El-Ansary and Hafez (2015). The rate presented the bank

performance through its earning ability on the available assets. Even there was the

negative gesture on the bank operation, the operators could attempt to increase the

60

profit or reduce the total asset. Then, the relationship between Return of Equity and the

Capital Adequacy presented positive. Through the strict regulation of the State Bank in

Vietnam, the firm forced to increase the level of capital to match with the standard.

However, the high level of equity may directly reduce the earning capacity of the bank.

Therefore, the improvement of the ROE may increase the capital sources. The last

empirical result presented the positive connection of the Equity Over Total Asset and the

CAR level. Aiming to remain the high rate of capital, the bank normally enhanced their

equity budget.

Recommendation

The new set of data could be more motivating by analyzing the liquidation ratio to

measure the operational effectiveness within different types of banks in Vietnam Berger

and Bouwman (2009). In addition, the researches limited the dataset from annual

financial reports which lacked of the external audit reviews. Therefore, the quality of

database could improve through further studies of bigger set of database and other

elements including in the bank operation. Moreover, the Government should set up the

specific regulation and strict application dossiers for the foreign investors to prove their

engagement and financial ability with the local business market to avoid tax avoidance.

When there are signal of issues for certain reasons, the banks tend to recheck all the

risky factors. Therefore, banking system hedged the faults, which may harm the degree

of capital adequacy.

In term of sufficiency capital, Vietnamese business banks should set up regulation for

capital raising guide with specific plans for investment structure, thinking about great

key accomplices, which effectively apply Basel Model to improve the brand reputation.

61

The banks should have prepared money and take a satisfactory influence in insecure

condition for Basel III application. Furthermore, these institutions additionally build up

great models for the effective merger and acquisition operation. Since then, the SBV

should think about an appropriate period to totally apply Basel II and Basel III into the

financial business. The banks characterization technique and capital ampleness

equation ought to be considered. Next, the SBV improves operational management

system to ensure the banks' investors' correct. To sum up, leading hypothetical explores

about impacts of a bank's default on money related division and the entire economy

also may encourage the SBV's choice towards undesirable business banks. In the

further researches, the other authors should indicate different sort of banks about

comparing the with other oversea banking enterprises in developed nations. Since then,

the domestic banks could improve the performance and cope with the global trends.

Word Count: 13,571.

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