Huy Lam Tan Ngo

Type of the article: Research Article

Abstract
This study examines how interest rates influence bank risk-taking within Vietnam’s transitional banking system, with a particular focus on how bank size moderates this relationship. While previous studies have linked prolonged low interest rates to increased risk-taking, Vietnam’s banking context – characterized by strict credit limits, frequent interventions, opaque ownership structures, and a tendency toward evergreening during tightening periods – suggests a reversed pattern. Using the System Generalized Method of Moments on annual data from 24 Vietnamese banks over 2014–2024, the findings indicate that higher interest rates are associated with significantly greater risk-taking. Specifically, the rediscount rate exerts the most significant impact on bank risk, followed by refinancing and interbank rates. Bank size also shows a negative baseline association with the Z score, suggesting that larger banks tend to take on more overall risk. This baseline risk in larger institutions is primarily driven by aggressive revenue diversification into volatile non-interest activities. Yet size also plays a crucial moderating role: larger banks demonstrate greater resilience when interest rates rise, as reflected in larger improvements in Z-scores and lower risk sensitivity compared with smaller banks, which are more vulnerable. Quantitatively, the adverse effect of interest rate shocks on the Z-scores significantly diminishes from the 25th to the 75th size percentile. This happens because larger banks successfully manage rising rates through funding advantages and diversified credit portfolios, while smaller banks react to these pressures by evergreening loans to conceal worsening asset quality.

Acknowledgment
The authors are thankful to the Internal Grant Agency of FaME TBU in Zlín, no. IGA/FaME/2026/016 for financial support to carry out this research.