The Reciprocal Impact of Credit Risk and Liquidity on the Stability of Vietnamese Banking System

Abstract

The reciprocal relationship between credit risk and liquidity risk has recently posed many challenges to the stability of the banking system. With a panel dataset of 22 Vietnamese commercial bank over the 2006-2019 period, this article considers the causal relationship between liquidity and credit risk by two-step system GMM, and Granger test for Panel Autoregression model (PVAR). The empirical findings provide statistical evidence that positive impact of liquidity on credit risk proved to be significant. Simultaneously, its reciprocal effect on banking stability, as proxied by Z-score, was verified by dynamic panel data analysis. Besides, the other important contribution was about threshold of liquidity, approximately 13,44%. The negative effect of credit risk was inclined to be weakened or eliminated when the liquidity is much higher than 13,44%.