The Basel Capital Requirement, Lending Interest Rate, and Aggregate Economic Growth: An Empirical Study of Viet Nam

24 Pages Posted: 4 Feb 2019

See all articles by Nguyet Thi Minh Phi

Nguyet Thi Minh Phi

Centre for Applied Economics and Business Research

Hanh Thi Hong Hoang

Vietnam National University Ha Noi

Farhad Taghizadeh-Hesary

Waseda University

Naoyuki Yoshino

Asian Development Bank Institute

Date Written: January 18, 2019

Abstract

In recent years, the Vietnamese economy has shown signs of financial distress, and especially small banks have experienced serious liquidity and solvency problems. Based on the new policy of the State Bank of Vietnam, in order to ensure safe and effective banking operations, the Basel II accord will be widely applied to the whole banking system by 2018. This paper investigates the effects of the Basel II capital requirement implementation in Viet Nam on the bank lending rate and national output. The paper provides a theoretical framework as well as empirical model by developing a Vector Error Correction Model (VECM) over the period 2018 to 2016 by employing three groups of indicators (macroeconomics, banking, and monetary). The main finding of the paper is that at the bank level, a tightening of regulatory capital requirements does not induce a higher lending rate in the long run. Also, changes in micro-prudential capital requirements on banks have statistically significant spillovers on the GDP growth rate in the short term; yet, their effects significantly lessen over a longer period.

Keywords: Basel II, regulatory capital requirements, bank capital, lending rate, aggregate growth

JEL Classification: G21, G28

Suggested Citation

Phi, Nguyet Thi Minh and Hoang, Hanh Thi Hong and Taghizadeh-Hesary, Farhad and Yoshino, Naoyuki, The Basel Capital Requirement, Lending Interest Rate, and Aggregate Economic Growth: An Empirical Study of Viet Nam (January 18, 2019). ADBI Working Paper 916 (2019). Available at SSRN: https://ssrn.com/abstract=3326960 or http://dx.doi.org/10.2139/ssrn.3326960

Nguyet Thi Minh Phi

Centre for Applied Economics and Business Research

Hanoi
Vietnam

Hanh Thi Hong Hoang

Vietnam National University Ha Noi

Farhad Taghizadeh-Hesary (Contact Author)

Waseda University ( email )

1-104 Totsukamachi, Shinjuku-ku
tokyo, 169-8050
Japan

Naoyuki Yoshino

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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