Note on a non-structural model using the disequilibrium approach: Evidence from Vietnamese banks

Abstract

Based on the non-structural model – disequilibrium approach (Goddard and Wilson, 2009), this paper presents an empirical assessment of the degree of competition within the Vietnamese banking system from 1999 to 2009. We examine more environmental covariates and different dependent variables compared to previous applications of this model. Moreover, we use lagged input prices (to avoid endogeneity) and exclude assets (to avoid specification bias) in our models. The results indicate that the Vietnamese banking system operates in a monopolistic environment.

Introduction

In the last two decades there has been extensive research on banking reforms in Central and Eastern Europe (CEE) – see Fries and Taci (2005); Bonin et al. (2005) and Staikouras et al. (2008). The common theme of these studies was to examine bank efficiency and the role of bank ownership. Only a few studies analysed the market structure in which commercial banks operate (Nathan and Neave, 1989, DeBandt and Davis, 2000). Particular emphasis was given to the privatisation and the role of foreign banks in the newly established banking system. However, there is limited research on the banking system in less developed economies. In particular, there are only a few studies on the Vietnamese banking system that provide a deep analysis and policy implications for the specific transformation process adopted by the Vietnamese government in the early 1990s. The specific approach applied by the Vietnamese authorities gives us an opportunity to compare the differences between the transition process in CEE and Vietnam. Such knowledge deepens our understanding of the optimal strategies that should be adopted by the authorities in other less developed economies.

Our study contributes to the research on the competitiveness of the banking sector in emerging and developing economies (Claessens and Laeven, 2004, Gelos and Roldos, 2004). We endeavour to provide a broader picture of bank competition in Vietnam. The main novelty of our study is the application of the non-structural model using the disequilibrium approach introduced by Goddard and Wilson (2009). We estimate H-statistics using models that exclude assets (to avoid specification bias) and include lagged input prices (to avoid endogeneity). We examine the ‘system’ and ‘difference’ generalised method of moments (GMM) estimators with both ‘one-step’ and ‘two-step’ specifications based on Arellano and Bond (1991) and Blundell and Bond (1998). The inclusion of time period dummy variables for all periods, in addition to economic covariates, affects the precision of coefficient estimates for some specifications. Hence, a general-to-specific method (GSM) is applied to remove redundant time period dummy variables in each model in an attempt to improve the efficiency of estimation and obtain meaningful H-statistics. We also assess whether the H-statistics obtained from the dynamic specification motivated by the disequilibrium approach are valid for inference. Furthermore, we employ a unique database of 48 Vietnamese commercial banks from 1999 to 2009. Such a database enables us to assess the impact of the main structural changes of the last decade and the results of this analysis enhances our understanding of the main differences of the Vietnamese banking system from other (transition) economies.

The paper is structured as follows. The next section details developments in the Vietnamese banking system while Section 3 explores a brief review of the previous empirical literature of the non-structural model. Section 4 focuses on methodology and data. Empirical results are presented in Section 5 and Section 6 gives conclusions.