Impact of monetary policy and diversification activities on performance: Empirical evidence from Vietnamese commercial banks

Abstract

The research investigates the impact of monetary policy on the profitability of commercial banks in Vietnam, particularly the influence of interest rates and other monetary policy measures. The study focuses on the critical issue of stability in the banking system in Vietnam, an undeniable factor in building a sustainable economy. The uneven and inflexible management of banks, especially pressure from monetary policies, has created significant and unpredictable fluctuations, significantly reducing the performance of commercial banks in Vietnam since 2011. Bank performance, mainly based on interest rates, has become a sensitive point, strongly influenced by monetary policies and unpredictable fluctuations in financial markets. This poses a major challenge in maintaining stability and development in volatile economic environments. The study proposes diversifying the income sources of commercial banks as a management strategy to reduce risks and enhance resilience when facing unforeseen pressures from monetary policies and markets. This is not only necessary but also important for banks to become flexible and adaptable in today's volatile economic environment. The research was conducted with a sample of 18 banks listed on the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) from 2012 to 2022. Our group applied the Ordinary Least Square (OLS) method to assess the impact. Subsequently, to enhance reliability and address potential errors (such as variance change and endogeneity), our group used Fixed Effects Model (FEM), Random Effects Model (REM), and Generalized Least Squares (GLS) models to rectify the flaws. The study demonstrates a non-linear relationship between interest rates and the profitability of commercial banks in Vietnam, depicted through an inverted U-shaped curve. An initial increase in interest rates implies an increase in profitability, but at high interest rates, the impact becomes negative. Furthermore, diversifying income sources helps mitigate the impact of interbank interest rate fluctuations, providing a basis for flexible and efficient financial management strategies for commercial banks amid volatile financial markets.