This paper examines how bank risk varies with change in financial market development through a dataset of 25 commercial banks in Vietnam. Empirical results show that the bank risk is positively associated with the development of Vietnam’s financial market. Based on the research findings, we provide implications for commercial bank management and policy-making efforts. | 110 Hoang Cong Gia Khanh & Tran Hung Son / Journal of Economic Development 23(3) 110-124 Financial Market Development and Risk of Commercial Banking Operation in Vietnam HOANG CONG GIA KHANH University of Economics and Law – hcgk@ TRAN HUNG SON University of Economics and Law – sonth@ ARTICLE INFO ABSTRACT Article history: This paper examines how bank risk varies with change in financial market development through a dataset of 25 commercial banks in Vietnam. Empirical results show that the bank risk is positively associated with the development of Vietnam’s financial market. Based on the research findings, we provide implications for commercial bank management and policy-making efforts. Received: 16 Aug. 2014 Received in revised form: 01 July 2015 Accepted: 04 July 2015 Keywords: Financial market development, bank risk. Hoang Cong Gia Khanh & Tran Hung Son / Journal of Economic Development 23(3) 110-124 111 1. Introduction A strand of research has indicated that financial market development has a positive impact on economic activities of a certain country through efficiently allocating capital sources to enterprises, facilitating risk management, scrutinizing business performance, and reducing costs of transferring resources (Levine, 1997; Merton, 1995). However, the development might also negatively influence banking institutions and the financial system, thus causing instability or even financial crisis (Demirguc-Kunt & Detragiache, 1998). Over the course of 20 years of reforming the financial system, Vietnam has seen a few preliminary achievements, one of which, most strikingly, is the rapid development of commercial banking system that allows the sector to well perform its financial mediation function in mobilizing and allocating capital resources in the economy (compared to other developing and transitional economies). Figure 1 plots the variance in the indicators of Vietnam’s banking system and stock market development, relative
