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

Author

Listed:
  • Minh Phi, Nguyet Thi

    (Asian Development Bank Institute)

  • Hong Hoang, Hanh Thi

    (Asian Development Bank Institute)

  • Taghizadeh-Hesary, Farhad

    (Asian Development Bank Institute)

  • Yoshino, Naoyuki

    (Asian Development Bank Institute)

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.

Suggested Citation

  • Minh Phi, Nguyet Thi & Hong Hoang, Hanh Thi & Taghizadeh-Hesary, Farhad & Yoshino, Naoyuki, 2019. "The Basel Capital Requirement, Lending Interest Rate, and Aggregate Economic Growth: An Empirical Study of Viet Nam," ADBI Working Papers 916, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0916
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    References listed on IDEAS

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    More about this item

    Keywords

    Basel II; regulatory capital requirements; bank capital; lending rate; aggregate growth;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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