Market structure, strategic interaction, and banks' behaviours in lending and risk-taking: evidence from Vietnamese banks

This study focuses on bank lending, risk-taking and the market structure manifested through strategic interaction in Vietnam. Strategic interaction, classified as aggressive competition (strategic complements) and accommodating competition (strategic substitutes), describes a firm’s reaction to price and/or quantity change by its competitors. During the past 10 years, the Vietnamese banking industry has been growing fast and become increasingly competitive, motivating commercial banks to improve efficiency. In this context, this study aims to examine the impact of efficiency on strategic interaction, a characteristic of market structure. In addition, such a competitive environment together with high credit demand in Vietnam can lead to a race to the bottom in terms of banking stability by inducing banks to pursue aggressive business strategies and to take on excessive risks. Given that strategic interaction can capture banks’ behaviours in a rivalrous situation, this study also investigates the impact of strategic interaction on risk-taking behaviours and the moderating role of strategic interaction on the propagation of macroeconomic shocks to bank lending of Vietnamese banks. Using a sample of 26 commercial banks in Vietnam from 2008 to 2018, this study employs Three-stage least square, System Generalised Method of Moments, and Panel Data regressions to analyse the data. This study finds that efficiency has a positive impact on strategic interaction among commercial banks, and this impact is stronger for banks with lower growth. In other words, as banks’ efficiency improves, they tend to be more active in strategic interaction with their rivals. The result extends the Efficient-Structure hypothesis emphasizing the importance of efficiency on market structure manifested through strategic interaction. This study also finds that the effect of macroeconomic and monetary policy shocks on bank lending behaviour is less pronounced when banks engage in a less competitively aggressive environment. The study contributes to the literature of bank lending by incorporating macroeconomic environment and behaviour (micro)-level to explore the credit lending of an individual bank. Furthermore, this study provides evidence that a competitively aggressive environment is unfavourable for banks striving for stability, and fast-growing banks reduce risk-taking more rapidly in response to aggressive competition. The study contributes to a growing body of literature on risk-taking by drawing the attention of bank managers to the importance of asset growth in maintaining market share.