This paper seeks to examine the effects of bank capital on profitability and credit risk of 30 Vietnam’s commercial banks from 2007 to 2014. Using the system generalized method of moments (GMM), the paper conducts several tests on the moral hazard and regulatory hypotheses on the relationships among bank capital, profitability, and credit risk. | Nguyen Thi Hong Vinh & Le Phan Thi Dieu Thao / Journal of Economic Development 23(4) 117-137 117 Effects of Bank Capital on Profitability and Credit Risk: The Case of Vietnam’s Commercial Banks NGUYEN THI HONG VINH Banking University HCMC – vinhnth@ LE PHAN THI DIEU THAO Banking University HCMC – dieuthaodhnh@ ARTICLE INFO ABSTRACT Article history: This paper seeks to examine the effects of bank capital on profitability and credit risk of 30 Vietnam’s commercial banks from 2007 to 2014. Using the system generalized method of moments (GMM), the paper conducts several tests on the moral hazard and regulatory hypotheses on the relationships among bank capital, profitability, and credit risk. With no regard to other determinants, its results indicate that the effects are evident, . bank risk is found to impact differently on bank returns, and it is also negatively associated with credit risk of commercial banks in Vietnam. Received: Nov. 27, 2015 Received in revised form: Mar. 18, 2016 Accepted: Sep. 23, 2016 Keywords: Bank capital, credit risk, profitability, commercial banks. 118 Nguyen Thi Hong Vinh & Le Phan Thi Dieu Thao / Journal of Economic Development 23(4) 117-137 1. Problem statement After the 2008 financial crisis the Basel Committee on Banking Supervision (BCBS) developed Basel III with new proposals concerning capital, leverage, and other standards on liquidity, which add in further measures on risk governance to enhance the regulation, monitoring, and management of risk in the banking industry (BIS, 2011). The newly introduced standards on capital and capital buffers demand more capital holding and higher quality capital, compared to those required in Basel II. In addition, credit crunches emphasized an urgent need to further capture the determinants of bank risk in the event of downturns in capital adequacy (Festic et al., 2011). Not surprisingly, the relations among bank capital, profitability, and credit risk become a .
