A new measure of cyclical credit portfolio allocation under uncertainty: Evidence from the Vietnamese banking system

This study proposes a conceptual framework for measuring cyclical credit portfolio allocation under sectoral uncertainty and implements it through the Credit Portfolio Cyclicality Index (CPCI). The CPCI is constructed by combining a behavioral alignment component, which measures the co-movement between sectoral credit shares and sectoral business cycles, with an exposure component reflecting banks’ lending to sectors in downturns, into a single portfolio-level index. A theoretical model shows that credit risk is not minimized when banks adopt a neutral stance. Instead, risk is lowest when banks make moderate, forward-looking procyclical adjustments. In contrast, excessive alignment in either direction, or high exposure to declining sectors, can increase credit risk. Using panel data from Vietnamese commercial banks over the 2005 – 2022 period, we empirically validate the model’s predictions. We also provide evidence that the CPCI contains predictive information about future credit deterioration. These insights carry important implications for macroprudential supervision, particularly in emerging markets. The CPCI is best interpreted as a behavioral diagnostic and screening measure that helps contextualize cyclical risk exposures, rather than as a stand-alone input into forward-looking supervisory frameworks.