The risk-return trade-off of liquidity positions: evidence from Vietnamese banking system

Abstract

The study investigates how liquidity positions affect bank performance at Vietnamese commercial banks for the period of 2007-2017, in terms of credit risk and profitability. We employ the generalised method of moments (GMM) for the dynamic panel models to implement some alternative regression techniques. The robust results indicate that the liquidity position induces a trade-off between risk and return. More precisely, banks holding more liquid assets tend to face less credit risks but yield less profits. These effects seem not to be strong and we also examine if the effect of liquidity on bank return exerts an increasingly downward slope depending on bank riskiness, but there is no significant evidence found. The findings of this study provide some insightful policy implications for banking market in Vietnam as well as other emerging countries.