Funding liquidity risk: does banking market structure matter?

Abstract

Purpose

The paper empirically investigates the link between banking market structure and funding liquidity risk.

Design/methodology/approach

With a panel of Vietnamese commercial banks from 2007 to 2021, the system generalized method of moments (GMM) estimator is applied as the primary regression method, while the random-effect model and the corrected least square dummy variable (LSDVC) technique are also considered in robustness checks.

Findings

Competition may increase banks' funding liquidity risk. This finding holds for competition measures derived from the Boone index and concentration ratios but not in the case of the Lerner index as a proxy for market power. Further results indicate that the funding liquidity risk of banks that are larger and have better performance (less credit risk and higher return) tends to be less affected by competition. Besides, the overall impact of bank competition on funding liquidity risk is amplified by the financial crisis and the COVID-19 pandemic.

Originality/value

The study extends the empirical literature by exploring the relationship between bank competition and funding liquidity risk. Additionally, the paper also studies how the impact of bank competition on funding liquidity risk depends on the characteristics of the banking sector and the macroeconomic conditions of the economy, including the moderating effect of the COVID-19 pandemic.

Citation

Huynh, J. (2024), "Funding liquidity risk: does banking market structure matter?", Managerial Finance, Vol. 50 No. 2, pp. 396-416. https://doi.org/10.1108/MF-02-2023-0097