The Impact of Income Diversification on Financial Stability: The Case of Commercial Banks in Vietnam

Abstract

In the context of powerful international integration and fierce competition, income diversification is an inevitable trend for banks to increase profits and reduce risks. The study investigates the relationship between income diversification and financial stability of commercial banks in Vietnam by using data of 27 commercial banks in the period 2008–2019. We use System - Generalized Method of Moment (SGMM) modeling techniques to solve heteroskedasticity, autocorrelation, and especially intrinsic endogeneity problems in the research models. Research results show that a commercial bank with greater income diversification tends to have a higher risk level. That means income diversification does not promote financial stability for commercial banks. Moreover, the authors also find that internal factors such as bank size, the efficiency of cost management, and ratio of deposits to liabilities as well as macroeconomic factors significantly influence financial stability of commercial banks in Vietnam.