The impact of GDP growth on banking stability in Vietnam: A PVAR model analysis

Abstract

This study investigates the dynamic interplay between real economic activity and banking system resilience in Vietnam using a quarterly panel of 29 commercial banks from Q1/2008 to Q4/2024. Employing a Panel Vector Autoregression (PVAR) framework, we trace how unexpected movements in GDP growth propagate to a standard measure of bank soundness—the Z-score, which captures a bank’s distance to insolvency by combining profitability, capitalization, and earnings volatility. The results indicate statistically significant bidirectional Granger causality between GDP growth and the Z-score, implying a feedback loop in which stronger macroeconomic conditions bolster bank stability, and a more stable banking sector, in turn, supports subsequent economic performance. Impulse-response functions show that a positive GDP growth shock raises banking stability in the short run, with the effect peaking around the third to fourth quarter before gradually dissipating. Interestingly, conventional income- and credit-risk channels—net interest margin (NIM), non-interest income (NII), and non-performing loans (NPL)—do not exhibit significant direct responses to GDP growth shocks. However, when we examine how NIM relates to the Z-score, the evidence suggests that the dominant transmission mechanism may run through monetary policy and bank-internal balance-sheet features such as capitalization and the stability of earnings rather than through margin widening, fee income shifts, or immediate improvements in asset quality. Taken together, these findings underscore the importance of countercyclical buffers and prudent capital management to sustain resilience over the business cycle. Policy implications include reinforcing capital and liquidity requirements that tighten in booms and relax in downturns, maintaining clear monetary policy communication to stabilize funding conditions, and encouraging diversification strategies that reduce earnings volatility without incentivizing excessive risk-taking. Such measures can help lock in the stabilization benefits of growth while limiting procyclical vulnerabilities in Vietnam’s banking system.