Page 32 - Vol 7- issue 1

REVIEW of FINANCE - Issue 1, 2025
The regression results reveal several noteworthy Notably, the interaction term DIV×HHI demonstrates
findings. Notably, the variable DIV has a positive a significant positive impact, confirming that loan
coefficient (0.308), significant at the 10% level. This portfolio diversification strategies are more effective in
finding implies that a 1% increase in loan portfolio highly concentrated markets.
diversification is associated with an average increase Policy implications
of 0.308% in the bank's financial stability (measured
by the logarithm of the Z-score), holding other Based on these findings, the study proposes the
factors constant. However, the 10% significance level following policy recommendations:
suggests that this effect is relatively weak, implying - Loan Portfolio Diversification Strategy: Banks
that the effectiveness of loan portfolio diversification should prioritize loan portfolio diversification,
may be constrained by other factors in the business particularly in highly concentrated markets, to enhance
environment. financial stability.
In contrast, the HHI variable (market concentration) - Market Structure Regulation: Regulatory authorities
exhibits a strong and highly significant effect, with a should monitor and manage market structures to
coefficient of 4.160. This result suggests that a 1% encourage large banks to play a leading role in the
increase in market concentration corresponds to market without compromising competition.
an average increase of 4.160% in the Z-score. This - Risk Management Practices: Banks should adopt
result underscores the potential for large banks in flexible risk management measures to mitigate the
concentrated markets to improve financial stability, adverse effects of inflation on financial stability.
potentially due to economies of scale, enhanced risk - Monitoring Large Banks: Regulatory oversight
management capabilities, or better access to stable should focus on large banks to ensure stability without
funding sources. fostering monopolistic behavior.
Notably, the interaction term between DIV and HHI - Supporting Small and Medium-sized Banks:
(DIV×HHI) has the strongest effect, with a coefficient Regulators should support small and medium-sized
of 9.468. This indicates that in highly concentrated banks in expanding their operations, improving risk
markets, banks that diversify their loan portfolios management capabilities, and diversifying their credit
achieve significantly greater financial stability. This portfolios to strengthen overall market stability.
finding supports the hypothesis that the combination * This work is a part of the research project
of diversification strategies and a concentrated market CSB2024-43 funded by SaiGon University.
environment can produce positive effects on risk
management and enhance bank stability. References:
Regarding the control variables, bank size (SIZE) 1. Adem, M. (2022). Impact of diversification on bank stability: evidence from
has a positive and significant effect at the 5% level, emerging and developing countries. Discrete Dynamics in Nature and Society,
suggesting that larger banks tend to exhibit greater 2022(1), 7200725.
financial stability. Conversely, inflation (INFL) has a 2. Akins, B., Li, L., Ng, J., Rusticus, T. O., (2016). Bank competition and
significant negative impact (coefficient = -0.207, p-value financial stability: Evidence from the financial crisis. Journal of Financial and
< 0.05), confirming that higher inflation can undermine Quantitative Analysis 51, 1-28.
bank stability. 3. Arellano, M. and S. Bond. (1991). Some Test of Specification for Panel Data:
The remaining control variables did not show Monte Carlo Evidence and An Application to Employment Equations. Review
statistically significant effects in the GMM model, of Economics Studies 58, 277-297.
indicating that their influence on financial stability may 4. Boyd, J. H., & De Nicolo, G. (2005). The theory of bank risk taking and
be overshadowed by other specific characteristics of the competition revisited. The Journal of finance, 60(3), 1329-1343.
Vietnamese banking sector during the study period 5. Chandramohan, K., Lunawat, C. D., & Lunawat, C. A. (2022). The impact of
diversification on bank stability in India. Cogent Business & Management,
Conclusion and policy implications
9(1), 2094590.
Conclusion 6. Meutia, N. S., & Chalid, D. A. (2021, May). Loan diversification, market
concentration, and stability in the Indonesian banking industry. In Asia-Pacific
This study investigates the relationship between loan Research in Social Sciences and Humanities Universitas Indonesia Conference.
portfolio diversification (DIV), market concentration 7. Shim, J. (2019). Loan portfolio diversification, market structure and bank
(HHI), and the financial stability of Vietnamese stability. Journal of Banking & Finance, 104, 103-115.
commercial banks using the Generalized Method of
Moments (GMM). The findings reveal that HHI has a Author information:
strong positive impact on financial stability, suggesting Nguyen Chi Duc, Tran Thi Thu Dung, Tran Thi My Phuoc
that highly concentrated banking markets can better Faculty of Finance and Accounting, Sai Gon University,
control risks through economies of scale. Additionally, Ho Chi Minh City, Viet Nam
DIV also exhibits a positive effect, albeit limited. Email: ncduc@sgu.edu.vn, tttdung@sgu.edu.vn, ttmphuoc@sgu.edu.vn

31