Excess liquidity and net interest margins: evidence from Vietnamese banks

Abstract

This study analyzes the impacts of excess liquidity in association with monetary policy rates on commercial banks’ performance – as indicated by their net interest margins (NIMs) – in Vietnam. The study finds that excess liquidity compresses NIMs and attenuates the positive impacts of policy interest rates on NIMs. The study argues that excess liquidity induces banks to reduce lending interest rates so as to facilitate credit expansion, making tightening monetary policy less effective. The study extends the monetary policy transmission literature to the context of an emerging economy with excess liquidity.