Digital transformation and financial risk in commercial banks: Empirical evidence from Vietnamese commercial banks

Abstract

This study investigates the impact of digital transformation on financial risk in Vietnamese commercial banks, in the context of the banking sector’s accelerating adoption of digital technologies to enhance operational efficiency and competitiveness. Utilizing panel data from 22 Vietnamese commercial banks over the period 2010- 2023, the study applies the System Generalized Method of Moments (System GMM). The level of digital transformation is measured using a text analysis approach applied to annual reports published by the banks. Financial risk is examined across three key dimensions: insolvency risk, credit risk, and liquidity risk. The empirical findings indicate that digital transformation significantly reduces credit risk and overall financial risk, while potentially increasing liquidity risk if not accompanied by adequate control mechanisms. Based on the empirical findings, the study suggests that developing a specialized legal framework for digital banking, implementing real-time risk monitoring systems, and integrating digital transformation into internal risk management strategies are critical policy implications to enhance system safety and promote the sustainable development of digital banking in Vietnam.