Monetary Policy and Bank Liquidity Creation: Does Bank Size Matter?

Figures & data

Table 1. Definitions and sources of main variables used in regression analysis.

Variable name	Description	Definition and construction	Data Source	Source of reference
Liquidity creation	FLC, NFLC	As described in Table 1	SNL Financial Database	Berger and Bouwman (2009)
Bank size	Bank size	Natural logarithm of total assets	SNL Financial Database	Horvath et al. (2016); Angeloni and Faia (2013)
Base rate	Base rate	The central bank’s interest rate (%)	IMF	Distinguin et al., (2013); Chen et al. (2017)
Open market operations	OMO	The ratio of the net amount of bonds sold and bought by the central bank over total transactions (%)	State Bank of Vietnam	Chen et al. (2017)
Non-performing loans	NPL	The ratio of non-performing loans to total loans (%)	SNL Financial Database	Horvath et al. (2016)
Net interest margin	NI	The lending interest rate minus the deposit rate (%)	SNL Financial Database	Distinguin et al. (2013)
Market share	Mshare		SNL Financial Database	Distinguin et al. (2013)
Bank age	Age		SNL Financial Database
GDP growth rate	GDP	GDP growth rate	General Statistic of Vietnam
Unemployment	Unemp	Unemployment rate	General Statistic of Vietnam
Trade balance	Trade	The gap between export minus import volume	General Statistic of Vietnam
Inflation	Inf	The inflation rate	IMF	Horvath et al., 2016

Table 2. Liquidity classification and construction of two liquidity creation measures.

Assets
Illiquid assets (weight = 1/2)	Semi-ilquid assets (weight = 0)	Liquid assets (weight = −1/2)
Corporate and commercial loans		Cash and due from other credit institutions
Other loans		Trading securities
Fixed assets		Derivatives
Other assets		Investment securities
Consumer/retail loans		At-equity investments in associates
		Other securities
Liabilities plus equity
Liquid liabilities (weight = 1/2)	Semi-ilquid liabilities (weight = 0)	Illiquid liabilities plus equity (weight = −1/2)
Customer deposits-current	Customer deposits term	Senior debt maturing after 1 year
Customer deposits-saving`	Term deposits from banks	Subordinated borrowing
Demand deposit from banks and other credit institutions	Other deposits	Other funding
Derivatives	Short-term borrowing from banks	Other liabilities
Discounts and rediscounts of valuable papersa	Certificates of deposit	Total equity
OBS activities
Illiquid OBS activities (weight = 1/2)	Semi-ilquid OBS activities (weight = 0)	Liquid OBS activities (weight = −1/2)
Acceptances and documentary credits reported OBS	Guarantees
Committed credit lines
Other contingent liabilities

Sources: Le (2019). Note: The Vietnamese commercial banks ensure to buy back these items within 91 days so they are categorised as liquid liabilities.

Table 3. Descriptive Statistics and correlation matrix.

	Variables	Min	Max	Mean	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	VIF
1	FLC	−15460112	2877186095	131112277	1.000
2	NFLC	−20910531	1807641550	111070095	.966**	1.000
3	Size	146156	52954715	8936751	.278**	.282**	1.000													8.839
4	NPL	.000	8.807	2.197	.031	.058	−.100	1.000												1.198
5	NIM	1.177	8.916	3.237	−.026	−.016	−.019	−.084	1.000											1.237
6	Market	0	.285	.044	−.256**	−.270**	.936**	−.053	−.045	1.000										9.926
7	Age	0	60	21.49	−.109	−.119	.658**	.067	−.184*	.724**	1.000									2.318
8	Inflation	−.191	22.673	8.75	.032	.007	−.009	.035	.190*	−.048	−.033	1.000								8.716
9	Trade	−18.02	12.20	−2.2300	−.012	−.023	.002	−.065	.004	−.005	−.007	−.652**	1.000							n/a
10	GDP	5.247	7.129	6.12	.032	.022	.054	−.290**	.013	.055	.007	.295**	−.390**	1.000						1.841
11	Unemploy	2.100	4.650	3.37664	−.034	−.009	−.016	.060	−.222**	.028	.024	−.388**	−.154	−.277**	1.000					6.595
12	Baserate	6.25	15.00	8.2273	−.004	−.006	−.030	−.029	.282**	−.084	−.059	.814**	−.490**	.304**	−.360**	1.000				6.338
13	OMO	−.076	.101	.000395	.007	.025	.020	−.214**	−.092	.052	.012	−.426**	−.056**	.506**	.325**	−.178*	1.000			2.247
14	Bankcap	.03	.96	.108	−.004	.004	−.322**	−.103	.134	−.328**	−.318**	.073	−.014	−.017	−.042	.034	−.027	1.000		1.185
15	Crisis		0	1	.045	.024	.035	−.111	−.177*	.101	.030	−.263**	.214**	.016	.200*	−.439**	.284**	.033	1.000	2.965

Notes: $FLC$ is fat liquidity creation (both on- and off-balance sheet activities, in US dollars). $NFLC$ is nonfat liquidity creation (on-balance sheet activities only, in US dollars). $Baserate$ is a base rate. $Banksize$ is measured by the total bank assets (in US dollars). Bankcap is measured by the ratio of a bank's equity per total assets. $NIM$ is bank net interest margin. $NPL$ is bank non-performing loans as a percentage of total bank assets. $Marketshare$ is bank share of total market deposits. $Age$ is bank age measured in years. $Inflation$ is the inflation rate. Trade is the trade balance, measured by the gap between export and import. It is calculated in billion US dollars. Trade balance is used as the instrumental variable for Base rate and OMO not an explanatory variable in the main models (i.e. the estimation models with FLC and NFLC as dependent variable), so its VIF value was not calculated in collinearity statistics of the main estimation models.

Table 4. The effects of monetary policy instruments on bank liquidity creation (FE Regression results).

	Dependent variable FLC		Dependent variable NFLC
	Beta	p-value	Beta	p-value
(Constant)		.316		.498
L.Baserate	−.130	.013	−.083	.024
L.OMO	.082	.072	.080	.728
L.Size	.227	.044	.137	.034
L.Baserate*l.Size	.108	.042	.100	.033
L.OMO*L.Size	.004	.974	.030	.794
L.Bankcap	−.107	.241	−.093	.311
L.Market share	−.091	.775	−.194	.545
L.NPLs	−.016	.069	−.019	.084
L.NIM	−.005	.056	−.024	.097
L.Age	.142	.265	.147	.252
L.GDP	−.017	.937	−.011	.960
L.Inflation	.270	.591	.082	.870
L.UNEM	−.113	.725	−.130	.687
Year dummy	.442	.318	.300	.500
Crisis	.051	.762	.047	.779
R-Square	0.789		0.673

Table 5. The effects of monetary policy instruments on bank liquidity creation (2SLS IV regression results).

Second stage regression
	Dependent variable FLC		Dependent variable NFLC		Dependent variable FLC		Dependent variable NFLC
	Beta	p	Beta	p	Beta	p-value	Beta	p
(Constant)		.328		.538		.370		.550
L.Baserate	−.067	.044	−.039	.037
L.Baserate*l.Size	.095	.041	.073	.077
L.OMO					.003	.098	.025	.890
L.OMO*L.Size					.003	.980	.025	.827
L.Size	.228	.049	.143	.021	.291	.055	.199	.039
L.Bankcap	−.104	.251	−.091	.316	−.100	.265	−.088	.329
L.Market share	−.105	.737	−.215	.492	−.131	.627	−.231	.396
L.NPLs	−.013	.088	−.020	.083	−.007	.093	−.026	077
L.NIM	−.008	.092	−.027	.073	−.002	.098	−.022	.081
L.Age	.144	.253	.149	.240	.141	.264	.146	.251
L.GDP	.041	.775	.036	.803	.025	.899	.019	.923
L.Inflation	.122	.696	−.025	.936	.040	.887	−.075	.789
L.UNEM	−.089	.774	−.105	.738	−.111	.728	−.127	.690
Year dummy	.342	.330	.217	.539	.379	.373	.254	.552
Crisis	.084	.551	.075	.595	.112	.379	.091	.479
R-square	0.789		0.672		0.721		0.689
First stage regression
	Dependent variable Baserate		Dependent variable OMO		Dependent variable FLC		Dependent variable NFLC
	Beta	p	Beta	p	Beta	p	Beta	p
Trade Balance	0.714	0.000	−0.057	0.0591	.033	.865	−.045	.816
Other variables	Yes		Yes		Yes		Yes
R-square	0.843		0.415		0.311		0.426

Notes: In the first stage, we estimate the effect of the instrumental variable on not only our key predictors (Base rate and OMO) but also our dependent variables (FLC and NFLC). In the second stage, we estimate the effect of each monetary policy variable using Trade balance as an instrumental variable separately. This is because the current Stata software only enables the use of instrument variables for more than one explanatory variable at one time.

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