THE INTERACTIVE EFFECTS BETWEEN CREDIT RISK AND INFLATION ON Z-SCORE: CASE OF VIETNAM JOINT STOCK COMMERCIAL BANKS

Abstract

This acticle found the interaction effect between credit risk and inflation on the stability of Vietnam commercial banks' operations, measured by Z-score. Random- effects model (REM), Fixed-effects model (FEM) and Panel-Corrected Standard Errors (PCSE) were employed to ensure the robustness of the statistical inferences. The dataset was collected from financial statements of commercial banks and macroeconomic data of the World Bank for the period from 2012 to 2020. Marginal effect of credit risk on Z-score depends on the annual inflation. Credit risk usually has a negative impact but can still positively affect on Z-score when inflation increases rapidly after periods of economic recovery. The marginal effect of inflation could be positive on Z-score in the case of high credit risk. The operational stability of commercial banks that strictly manage credit risk might be more tolerant of the effects of inflation because slowing credit growth would cancel out the potential benefits of inflation.