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Lecturer, Faculty of Finance and Banking, Hanoi Open University, Hanoi, Vietnam
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Lecturer, Faculty of Banking and Insurance, Academy of Finance, Hanoi, Vietnam
Lecturer, Faculty of Banking and Insurance, Academy of Finance, Hanoi, Vietnam
This paper examines the determinants of capital buffers (CB) of 31 Vietnamese commercial banks over the period 2010-2024, taking into account the impact of income diversification ("DIV") under regulatory constraints (CARmin). In order to tackle endogeneity, unobservable heterogeneity, and panel persistence issues, a dynamic system GMM two-step procedure is applied. The post-estimation diagnostics involved Arellano-Bond's AR (2) test of serial correlation on second-order (p =0.724) and Hansen's test for exogeneity of the instruments (p = 0.461), revealing that the model was correctly specified and instruments were valid (18 instruments<31 groups). The results reveal that lagged capital buffer (CB๐๐ก−1) is positively and significantly correlated with current buffers. This indicates dynamic capital adjustment behavior. Operating efficiency, proxied by the cost-to-income ratio (CIR), and bank size (SIZE) both exert statistically significant negative (๐ < 0.01 and ๐ < 0.05, respectively) on capital buffers, supporting cost-efficiency principles and the "too-big-to-fail" hypothesis. Notably, while direct effects of credit risk (NPL), credit growth, and liquidity (LIQ) are statistically insignificant (๐ > 0.10) due to strict macroprudential regulatory constraints, the interaction variable (NPL × DIV) is positive and statistically significant (๐ < 0.05). The results from marginal effects analysis confirm that non-interest income diversification is a key buffer in eliminating the negative effect of credit risks on capital buffers with the increase in sources of income. These findings of the study give empirical proof that will assist bank managers and regulators to realize that non-interest income diversification coupled with cost management creates resilience and dynamic capital allocation in emerging economies.
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