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Contents
Chapter 1: Introduction.................................................................................................1
1.1 Introduction.............................................................................................................1
1.2 Background of the research....................................................................................1
1.1.1 The background of loan and deposit in Vietnam...............................................1
1.1.2 The need of understanding motivation for setting CAR level............................2
1.3 Research aim and objectives..................................................................................4
1.4 Research structure..................................................................................................5
Chapter 2: Literature Review...........................................................................................6
2.1 Banking System in Vietnam....................................................................................6
2.1.1 Overview...........................................................................................................6
2.1.2 The banking system under the effect of Financial Crisis...................................8
2.2 Correlation between bank deposit and lending rate..............................................10
2.3 Deposit classification and bank requirement in Vietnam.......................................13
2.3.1 Type of deposit performance of commercial banks in Vietnam.......................13
2.3.2 Reason for bank capital requirement..............................................................15
2.4 Loan performance in the banking system.............................................................16
2.4.1 Different type of loans.....................................................................................16
2.5 Adjusted deposits and loan policies to defend future crisis...................................17
2.5.1 New lending rate regulations..........................................................................17
2
2.5.2 Setting rule for capital adequacy ratio.............................................................17
2.5.3 Increase capital through Basel II model in Vietnam........................................19
2.5.4 The changes of Bank Capital Regulation in the Basel III................................20
Chapter 3: Methodology.................................................................................................22
3.1 Research objectives..............................................................................................23
3.2 Research method..................................................................................................23
3.3 Research design...................................................................................................24
3.4 Research method..................................................................................................25
3.5 Data collection......................................................................................................25
3.5.1 Source of data.................................................................................................25
3.5.2 Data type.........................................................................................................28
3.5.3 Sampling.........................................................................................................29
3.6 Analysis and model...............................................................................................29
3.7 Ethical issues........................................................................................................30
3.8 Limitation...............................................................................................................30
Chapter 4: Results.........................................................................................................31
4.1 Deposit and loan ratio on the bank performance..................................................31
4.1.1 Descriptive data..............................................................................................31
4.1.2 Summary output of Regression Statistics.......................................................32
4.2 Elements impact on performance of Capital Adequacy Ratio............................33
3
4.2.1 Descriptive statistics.......................................................................................33
4.2.2 Summary output..............................................................................................35
Chapter 5: Discussion....................................................................................................35
5.1 The relationship between deposit and loan in term of banking operation 2000....36
5.1.1 The total amount of deposit and loan during 2008-2015.................................36
5.1.2 In term of deposit and loan ratio on the bank assets......................................39
5.2.1 the CAR level in Vietnam comparing with the global standard........................44
Chapter 6: Conclusion....................................................................................................52
Reference.......................................................................................................................56
4
Abstract: There were many scholars investigating on the effectiveness of relationship
between deposit and loan performance to improve the bank revenue and reduce credit
risks (Assaf et al., 2011). However, it is the lack of study for the topic in context of
Financial Crisis. Plus, the emerging market like Vietnam with thin level of equity raised
the requirement for adapt new capital adequacy regulations. Therefore, the research
has investigated the relationship between deposit and lending rate in the context of
bank assets. At the same time, the financial indicators also took into account for
estimating the factor impacting in setting capital process.
5
Topic: the relationship between deposit and loan as well as the factors impact on the
minimum capital adequacy ratio.
Chapter 1: Introduction
1.1 Introduction
The chapter considers as the introduction segment for the dissertation, which cover the
research targets and motivations. The Financial Crisis chaos the global economic
systems by bankruptcy in different market. It directly impacted on the Vietnam economy
through different perspectives. This research focused on the strength between the
deposit and loan in the context of Global Crisis and motivated to find out the factors to
improve the level of equity capital. The beginning chapter provides introduction and the
statement for issues in light of the main objectives of the research.
1.2 Background of the research
1.1.1 The background of loan and deposit in Vietnam
Financial institution effectiveness investigations primarily consider banks as mediators
between savers and borrowers. Sealey and Lindley (1977) stated that loaning
application and other properties regard as outputs, and deposits and other debts are
treated as financial inputs. Subsequently, financial institution effectiveness
investigations concentrate on lowering the deposits adopted (input-oriented), on
increasing the offerings of loaning (output-oriented) or on both of them (non-oriented).
6
For instance, overall deposits were adopted (besides labour and tangible capital) to
assess the input effectiveness of Shinkin financial institution (i.e. Japanese credit
relationships) between 2000 and 2006 (Assaf et al. 2011). Contrary, the output-oriented
effectiveness of Indian financial institutions in creating client loaning was analysed by
Fujii et al. (2014).
Therefore, Nguyen and Simioni (2015) adopted new entire loaning activities (besides
other gaining properties and inefficient loaning) to examine the output-oriented full
aspect performance of Vietnamese financial institutions alter during the 2008 – 2012
period. Notwithstanding, only a small number of these investigations have addressed
the financial institution's effectiveness under the causative correlation between loaning
application and deposits. For example, Berger and Sedunov (2017) likewise discovered
cooperative relationship between the two elements of deposit and loaning. It raised the
question about the two indications presenting to the original function of banking system,
to resolve liquidity risks and understand the concept of liquidity creation.
Adapted from previous experiences, Vietnam's economy has created positive changes
and achieved optimistic signals in socio-economic growth. The return of the banking
system with strong business growth results has contributed positively to the overall
development of the country. However, the Vietnamese banking system is also facing
challenges when facing many potential risks that could unsafe the whole system from
the uncompleted credit system and the failure of the Financial Crisis. In order to protect
the domestic financial system, the State Bank of Vietnam (SBV) apply to ensure safety
in the operation of the banking system, which involve to issues of minimum capital
adequacy ratio (CAR) through loan and deposit requirement. Moreover, expectation to
7
join international economic integration is a premise for the development of Vietnam's
financial market. From the point of view, the study focused on the application of
international standards from the establishment of Basel I and II, which is extremely
necessary for Vietnam's economy to integrate more deeply into the global financial
economy.
1.1.2 The need of understanding motivation for setting CAR level.
There was a positive change through encouraging signal in socio-economic growth of
Vietnam. The return of the banking system with strong growth in business performance
has positively contributed to the overall development of the country (Gray 2006).
However, the Vietnamese banking system is also facing challenges when faced with
many potential risks that can cause unsafety to the whole system (APRACA 2017).
Then the problem is that the Government needs to select the suitable model to ensure
the safety of the banking system. Therefore, the study and application of international
standards is extremely necessary for Vietnam's economy to integrate more deeply into
the global financial economy. International banking safety standards was practical by
the State Bank in Vietnam from the issuance of Basel I. Currently, the State Bank has
issued Circular 36 in 2014 on minimum capital adequacy ratio in ensuring the safety of
the banking system's operations. Since then, the banking operations required to achieve
the minimum capital adequacy ratio (CAR) in other to ensure the connection between
equity capital and risk-adjusted assets at over 9%. It is also an important measure to
measure the operational safety of the bank, helping the banking system in Vietnam to
withstand external and internal shocks of the economy. Statistics of the State Bank of
8
Vietnam recently showed that the credit growth much faster than the equity growth rate
caused the CAR of commercial banks to decline rapidly, leading to difficulties in banking
expansion. business activities. Therefore, keeping the capital rate at a moderately high
level to ensure that the bank operates safely and business effective process is one of
the top priorities (Horakova 2012). It will not be easy to do because capital adequacy is
affected by many different factors including controllable and incontrollable issues. From
this point of view, it is necessary to practice and evaluate the factors affecting the
minimum CAR of commercial banks in Vietnam.
The purpose of the capital adequacy ratio is for commercial banks to operate stably,
limiting the commercial banks chasing profits, avoiding the increasing investment
(lending) of commercial banks in risky areas. In addition, in order to ensure the banking
system operates continuously and stably, the Basel Standard was established to
regulate operational safety issues for each commercial bank and for the whole banking
system. One of those rules is about minimum capital adequacy ratios. Baker and
Wurgler (2015). said that the correct application of capital management standards
would help commercial banks minimize the bankruptcy process and help commercial
banks operate stably. The previous study of Repullo and Suarez (2013) claimed that
banks that meet capital adequacy standards have better business performance than
banks that do not meet capital adequacy standards, which is reflected in results of
capital mobilization, credit performance and business results. In addition, Kamau and
Kariuki (2014). also supported that a good capital adequacy ratio helps commercial
banks avoid the risk of bankruptcy because they always satisfy their liquidity needs and
have the ability to grow profits in the future.
9
1.3 Research aim and objectives
The financial crisis generated may difficulties for economy in the period of 2008-2015.
Therefore, it is important to find a solution for defend similar disasters in the future and
take advantages by the past experience. How banking operators could be able to
handle and performance the business smoothly during the chaos, which bring many
opportunities for the firm. Therefore, the main motivations for the research is how to
support the banking business to response with the financial damage. Since then, the
research process is to constitute and empirically examines the correlations between
loan and deposit in the financial field in Vietnam from 2008 to 2015. Three primary tasks
are described as follows:
- Verify and give new empirical proof about the correlations between loaning and
deposit in light of the financial crisis.
- Important factors could impact on the requirement level of Capital Adequacy
Ratio.
- Support Vietnamese financial institution to set new regulation for loaning and
deposits, capital requirement more efficiently.
1.4 Research structure
For the first statement, the paper uses a regression analysis method to drawn the
relationship between the loan and deposit as well as the influence of them on the bank
size. The regression model also used to scale the impact of independent variables on
the minimum CAR. The analysis results show that the lending and deposit ratio created
strong positive relationship between them as well as with the bank assets. In addition,
10
only return over equity and equity over total assets created positive relationship
correlated with the CAR performance.
The research adapted the secondary database from analyzed the factors affecting the
CAR of 44 banking operations in the period 2008 - 2015. The dataset showed factors
include Total Loans, Total Deposits, Total Deposits Ratio, Total Loans Ratio, Returns
Over Assets, Returns Over Equity, Equity Over Total Assets, Capital Adequacy Ratio are
used for inclusion in the research model. Research results show that high liquidity
assets and credit risk provisions have a positive impact on CAR. Meanwhile, bank size,
capital mobilization ratio and ROE have a negative impact on CAR. This study found no
quantitative evidence of the impact of leverage and lending rates on CAR.
Chapter 2: Literature Review
The 2007–2010 financial crisis has vividly highlighted the importance of the stability of
the banking sector and its role in providing credit for global economic activity. In the
decades prior to the credit crisis, however, most of the macroeconomic literature tended
to overlook the role of banks as a potential source of frictions in the transmission
mechanism of monetary policy (Campello et al. 2010). For example, most central banks
around the world did not regularly include the banking sector in their macroeconomic
models. There were three main reasons for this limited interest in the financial structure
from a macroeconomic perspective. Vietnam was a developing nation with developing
economy regulations and framework, which required changes to adapt with the world
financial crisis. The following contents gives the basic knowledge about the banking
system of Vietnam for a general perspective. The next part will review about the
correlation between bank deposit and lending rate. The last section regards the process
11
of changing from Basel I to Basel II of Vietnam banking institutes.
2.1 Banking System in Vietnam
2.1.1 Overview
The improvement of the financial sector in Vietnam and its operation has been analysed
by numerous investigations, consisting of market descriptions from international banking
organisation such as WB or IMF and independent scholars (Ngo 2012; Nguyen and
Simioni 2015). To be specific, Vietnamese small and medium-scale financial institutions
were not as effective as significant and extremely significant financial institutions, and
the small banks witnessed the lowest effectiveness percentages (Stewart et al. 2016).
Ngo and Tribe (2017) and Nguyen et al. (2016) also determined similar results about
large-scale banks operate more effective than small-scale due to the gap in chartered
capitals. For example, in the top 10 of largest chartered capital banks, the first one is
BIDV has three times higher capital than the SHB – the last bank in top ten (Vietnambiz
New 2020).
In addition, Vu and Nahm (2013) stated that regarding revenue effectiveness, the
financial institution in Vietnam performed would lower than the frontier in the 2000-2006
interval. From the beginning of 2006, Vietnam applied the concept of Basel II but it
faced the barriers from The Financial Ciris 2008. The failures caused a numerable
banks collapse and bankrupt, especially the bank with small charted capital and less
liquidity ratio. The Basel II reform has stopped due to the concern about the post-crisis
global reforms is the high associated costs and difficult to measure the defending
effectiveness, high chance of loss due to the failure of previous regulatory operation
12
(Dragomir 2010). However, the second reform to move forward with Basel operated in
2014 for achieving international banking standard and regulations. SBV set Basel
standards to defend incapable banks and improved financial stability through liquid
ratio, required capital, pressure endurance (Clarke 2015).
Ngo (2012) stated that because in 1990, the banking system transferred one-tier into
two-tier, the fiscal operation of banks in Vietnam has sharply enhanced when it comes
to the quantity of financial institutions, the scale of fiscal field, the number of financial
behaviour, and transactions. Until 2008, banking system in Vietnam is one of the most
grow up majors. Things have changed after the Global Financial Crisis in 2008 when
there was pressure about capital requirement for the banks. In the period of 2008 -2012,
the banking industry faced with the most difficult period with range of collapse in the
international banking system creating banking capital adequacy, market liquidity risk. It
leads to the expectation for renewal operational management and policy to strengthen
bank capital, defending future crisis.
Nevertheless, only few investigations have concentrated on the financial institutions'
effectiveness under the causative correlation between loaning and deposits (Ngo and
Tripe 2017). Thus, our research seems to be the very first experiential examination on
the specific association between the performance effectiveness of financial loaning and
deposits in Vietnam with Basel II to defend crisis. It will give clear view how developing
economy like Vietnam could recover quickly in 2014 after the crisis.
2.1.2 The banking system under the effect of Financial Crisis
13
The banking crisis strongly impacted on the financial system from the relaxing interest
rate. The State Bank framed the interest rate with the combination of the refinancing
rate and discount rate in figure 1. It illustrated the strategy of the SBV in relaxing the
rate of interest ceiling when the rate before and after the Financial Crisis does not
change much in the beginning and the ending period of the Shock (Vo and Ellis 2018).
However, the interest ratio increased in the year of 2011, which created the foundation
for the raise of deposit rates in the next period. In specific, the ratio started at 7.5
percent in 2008 and increased throughout the Crisis period. In 2009, the interest rate
ceiling at 8 percent and increased to 9 percent in 2010. After that, it achieved a peak in
2015 with 15%. During the periods, the Vietnam economy strongly suffered from the
global chaos with the drop in the growth rate of major industries such as banking, real
estate, and finance.
From the point of view, the SBV did not set fixed regulations for control the deposit and
loan rate and floated it with the market trend. It created the foundation of the start of
financing rivalry between banks when the guideline focused on the interest rate
between deposit and loan at a low rate. It leads to the fails of the financial and economic
system since the crisis appeared in the year of 2008. In the segment of finance and
banking, the nature of bank resources weakened when getting firms fell into trouble
because of the reduction in salary, benefits, and FDI development (Anwar and Nguyen
2011). There were many issues including the bad debt from the commercial banks,
strict credit regulation. In which, the borrowers need to fill in the letters of credit, and
improvement process of financial stability became more difficult. Plus, the increase of
inflation and interest rate forced the local enterprise to seek foreign investment sources
14
and funding to remain business. To avoid the lack of liquidity in the local financial
market, the State Bank offers promotions to improve the economy including promoting
the interest rate discount and credit easing. By the way, the domestic credit could
improve and encourage the economy through the banking operation. To do that, the
local Government set out a specific credit improvement strategy to support the
commercial banks and local firms to continue creating and work in the troublesome
period. However, it outsourced the negative effects of the interest rate deduction and
relaxing credit policy. First of all, whether the bank could remain the high level of deposit
during the interest rate reductions. Secondly, the credit arises mostly in terms of loan
accounts, subsequent possible consequence to financial ruin. Therefore, the deposit
and loan performance in the context of Financial Disaster investigated to give a clear
perspective about the bank performance. Moreover, it also shows the impact of different
factors in the context of the capital required to promote business during a difficult
period.
2008 2009 2010 2011 2012 2013 2014 20150
2
4
6
8
10
12
14
16%
Figure 1: interest rate of Vietnam in 2008-2015.
15
Source: The State Bank of Vietnam (2020).
2.2 Correlation between bank deposit and lending rate
Having discussed the hypothetical document in term of the correlation between
loaning behaviour and deposits; thus, finding evidence and experiences of this
relationship is suitable. Numerous examinations have investigated the association
between loaning and deposits rates. Bellando and Lavigne (1992) created an
experiential analysis between deposits and loaning ratios in four EU nations which
are Germany, Great Britain, Italy and Spain. These are the nations that do not have
limitations on deposits rates. The examination adopted the Granger – causality
method. The investigation illustrated that the level of interbank competition
influences the causative feature. For instance, an extremely competitive deposit
context results in a one-way causality from deposits to loaning ratios, while an
oligopolistic practice on the deposit context impact negatively the causative
correlation that can be inverse. The circumstance of Spain illustrates that, at least
for the short term, rising competitive feature in the deposit context support the
causal relationship between deposits and loaning behaviour.
Ewing et al. (1998) described that the equilibrium increase between the deposit and
loaning rate is stable, which means that the spread goes back to its long term
balance condition, continuing a shock. Hence, if financial institutions are capable
enough, they may receive better revenues than ordinary or unusual revenues. In the
same way, Burgstaller (2005) investigated the correlation between the loaning and
deposit degrees in Austria between March 1995 and June 2003. The examination
16
adopted Granger non-causality in a vector autoregressive model. To be specific, the
analysis continued Toda and Yamamoto (1995) study by including one increasing
lag to the dynamic framework. The examination does not adopt this, it helps proper
Granger non-causality conclusion to be done in the unit-root context. The findings
illustrated that the loaning degree responds to deposit degree alterations are
unimportant for the period after the shock. Besides the forecasted feature of market
interest degrees, deposit degrees do not have that for loaning degrees. The
investigation stated that the outcomes underpin that deposits are to be verified as
the output of banks' operation proceeding. It means that it is regarded as other
findings of the output feature of deposits in financial operation.
The correlation between the loaning and deposit rate in the East of Europe was
analysed by Chang and Su (2010). In this investigation, inadequate error-correction
frameworks were evaluated to illustrate the significant changes of the loaning –
deposits increases. To be specific, the analysis adopted Enders and Siklos (2001)’s
threshold framework. The statistics utilised in this analysis are monthly examinations
on the lending rate (LR), and the 1-month affirmation of the deposit rate (DR) during
the 1998 – 2007 period. The findings show that long term non-linear cointegration
correlation between the loaning and deposit degrees exist. Similarly, Chang, Chen,
Su, Zhu and Liu (2011) employed Breitung (2001)’s non-parametric level
examination. It aims to find out if there is a long-term balance correlation among G8
nations’ loaning and deposit degrees. The investigation notably employed a
Threshold Error Correction Model (TECM) to discover if any same associations are
perceivable possibly non-linear behaviour of the loaning and deposit degrees.
17
Monthly examinations between 1998 and 2009 were adopted for these evaluations.
The outcomes demonstrated that long-term non-linear cointegration correlations
between the loaning and deposit degrees definitely exist and ultimately discover the
influential modification in G8 nations.
In case of Vietnam, the deposits created positive impact on the loan performance;
however, the loans has no influence on the implementation of the deposits (Nguyen
et al. 2018). In addition, the operational efficiency of deposit transaction is much
higher than the borrow loan, banking system needs to pay attention on managing
productivity. Moreover, the banks faced with trouble to improve quality loan and
controls the growth of non-performing loans.
2.3 Deposit classification and bank requirement in Vietnam
2.3.1 Type of deposit performance of commercial banks in Vietnam
To defend bankrupt cost for the banking institutes, the equity and deposit finance plays
important role. With the neutral risk level, the investment for equity capital creates high
expectation in the return revenue rather than into risky portfolios (Demirguc-Kunt and
Huizinga 2010). Therefore, banks with positive and strong capital ratio will be able to
decrease the change of collapse. It relates on the requirement for the level of registered
capital to secure the deposits. By the way, the capital could not use for investing in the
risky portfolios, reducing the risk of loss. For example, if the firms listed in the stock
exchange floors, they normally expected to remain good performance through ensuring
the equity capital and good revenue.
Classification of deposits in commercial banks are very important role in the operation of
18
commercial banks (Guru et al. 2002). The classification of deposits will help to manage
it more easily and take measures to mobilize more deposits depending on the purpose
of the bank's operations. There are many ways to classify deposits in commercial
banks; however, the research included the most common types in Vietnam. According
to this classification, deposits can be divided into the following three main types:
demand deposits, term deposits, and savings deposits (Pham and Riedel 2012).
Demand deposit
The concept of demand deposits is a type of deposit that is no limited
withdraw period, which means depositors have the right to cash out money at
any time (Goldstein and Pauzner 2005). Therefore, the bank listed this type of
account demand deposits, which means deposits with indefinite periods.
However, the payment function of this demand deposit depends on the
commercial bank regulation who issued it (Musser et al. 2014). If depositing
money into this account at a commercial bank has branches in other nations,
then the demand account could process the payment and cash out quickly in
foreign nations. That's why demand deposits are viewed as closest picture to
cash in all types of commercial banks. However, in developing countries,
payment by demand account is not popular because branches of commercial
banks in these countries are few and not widely spread to both remote areas
or have bad relations with other banks; moreover, the customers prefer to use
cash (Kight et al. 2004). In term of Vietnam, the deposit interest rate dropped
from 12.7% to 5% in the period of 2008-2019 (Worldbank 2020).
Term deposit
19
Definition Term deposits are types of deposits entrusted to a bank that have
an agreement on the time to withdraw money between the bank and the
customer. Therefore, in principle, customers can only withdraw money when
the agreed deadline. In fact, these types of periodic deposits are not deposits
in the legal confirmation regarding to financial law as the form of a bank
deposit. However, the classification of term deposit presented as an
exception to the unusable rule, because the customer only has to refund the
deposit on the contractual maturity date. Nonetheless, if the customers wish
to get back the money before due date, it will affect the operational system of
the bank. Therefore, with such sudden withdrawal requests, the interest rate
that the bank pays for customer deposits will be very low as a form of penalty
for affecting the investment plan of the bank (Leung 2009). After the Financial
Crisis, interest rates are usually the same as those of demand deposits due to
competitive factors. In Vietnam, the most common term of deposit is 3
months, 6 months, 12 months and 18 month periods with different interest
rate (Tran et al. 2015).
Saving deposit
Feature of a deposit account in the form of savings is very diverse and
popular in the economy mobilized by commercial banks is the savings (Van
Dung et al. 2015). Even there are many deposit accounts, becoming a very
important proportion of the deposit capital in mobilized system. Specially,
demand deposit saving account with the low interest, providing the main
capital sources for the bank because it is very beneficial to lend.
20
2.3.2 Reason for bank capital requirement
It highlighted the bank capital as one of the most significant elements to sustain the
banking operative structures. In the research of Miah and Uddin (2017), the high level of
capital of the bank during the decision making process, could support its to reduce
potential investment and systematic risks. When banks invested in risky assets, it is
high chance for loss the investment. In this case, the lack of equity negative influenced
the business revenues of the bank from the equity deduce. Therefore, it creates
threaten for the bank to invest in the risk assets.
Besides, if the equity ratio is not strong enough, the bank may take advantage under the
social perspective. To be specific, the banks are able to maximize the risk and
destructive investment value, which boost the return of equity for the bank through the
fee of loan borrowers and coverage for deposit amount. However, the increase of
required capital may lead to the possibility to return the loans and forces the banks to
take more hazards (Beck et al. 2010).
2.4 Loan performance in the banking system
2.4.1 Different type of loans
One of the important determinants for assessing the quality of bank assets is
nonperforming-loan (NPL). Overall banking crisis theories indicate that the negative
impact of bad loans to the economy can see at two levels. At the micro level, Berger
and Young (1997) identifies the impact of bad debt to the operation of the banking
system is that when a loan becomes overdue, the bank increased greatly increased
21
costs more to handle the problem. Karim et al. (2010) believe that these expenses do
not create value for the bank, so it is obvious that once NPL rises, the bank will
ineffectively operate. Traditionally, sustained high levels of profitability would enable the
bank to boost capital and improve its economic viability, thus negatively related to the
probability of failure. However, Ergungor & Thomson (2005) argue that this logic is
wrong, especially in the case the economy experience expansionary monetary policy
with low interest rate. Under their view, excessive monetary growth usually comes with
an increase in value of assets such as real estate, stocks, and consumer loans.
Banks respond rationally to these changes by increasing their market share because
increasing price of assets raise a good signal that profit on these markets is increasing
while risk is falling. This tendency continues until one believes that the asset prices will
continue to grow. However, as discussed by Ergungor and Thomson (2005), a long
period of rising asset prices and booming credit is probably causing highly inflationary
economy that creates strong incentive for the governments to intervene. In this
situation, higher interest rate and restriction on loan policies introduced to cool down the
economy. As a consequence, unexpected scenarios are triggered later on such as
economic growth slows down, depressing asset prices, lowering borrowers’ ability to
pay, increasing loan defaults, and eventually eroding banks’ capital.
2.5 Adjusted deposits and loan policies to defend future crisis
2.5.1 New lending rate regulations
After the financial crisis in the period of 2008-2012, Vietnam government issued new
law about the lending interest ratio with the loan relating with multiple parties. In which,
22
the decision No. 91/2014/QH13 regulated the rate for borrowing loan could not expect
20% annually (Phi et al. 2019). Previously, most of the banking institutes applied the
rate of lending in the range of 7% to 10% annually with the maximum rate roughly 14%.
However, the consumer loans will charge about 25% to 40%, which is much higher than
the Civil Code regulation. Therefore, it raised the argument about the practical
implementation for the standard lending rate under Civil Code. After that, the new rate is
adjusted by the state bank approving financial firms to set the lending rate for
consuming loan.
2.5.2 Setting rule for capital adequacy ratio
The purpose of setting regulations for deposit and loan condition is for commercial
banks to operate firmly, to limit the commercial banks to run after profits, to avoid
commercial banks to increase investment (lending) in risky areas (Clarke, 2015). In
addition, in order to ensure the continuous and stable operation of the banking system,
the Basel II regulate operational safety issues for each commercial bank and for the
whole banking system. One of those regulations is about the minimum required capital
adequacy ratio (CAR). Ivashina and Scharfstein (2010) explained that the precise
performance of capital management standards would assistance commercial banks
preserve bankrupt and upsurge liquidity ratio. Banks that meet capital adequacy
standards have better business results than banks that do not meet capital adequacy
standards, which reflected in capital mobilization results, credit operation results and
business results (Gray 2006). Likewise, Horakova (2012) believed that banks should
increase regulatory capital complying with the organisational structures and scales to
23
avoid the fasten growth extent its capacity because they always meet the liquidity needs
and are likely to grow profits in the future. Previous researches also paid attention about
financial institute adapting the concept of Capital Adequacy Ratio (CAR), which
reviewed to create pattern for Vietnam financial association. For example, the study of
Bateni et al. (2014) on factors affects CAR for the period of 2006 to 2012 indicates that
the loan ratio, ROE, ROA and equity ratio have a positive correlation with CAR. Other
research by El-Ansary and Hafez (2015) showed that factors affecting CAR have
changed before and after the financial crisis in 2008. The author collected data from 36
commercial banks in Egypt from 2003 to 2013. Results research results show that, in
the period before the crisis, factors of asset quality, bank size and profitability factor had
a statistically significant impact on CAR. After 2008, loan, deposit, liquidity, management
capacity and credit risk are the factors that have a statistically significant impact on
CAR.
2.5.3 Increase capital through Basel II model in Vietnam
International banking safety standards practical for the first time by the State Bank in
Vietnam after Basel I issued. Presently, the SBV has issued Circular 36 in 2014
referring to the minimum capital adequacy ratio in ensuring the safety of the banking
system. The minimum capital adequacy ratio is an economic indicator reflecting the
relationship between equity capital at 8% for Basel I and II only. It is also an important
measure to measure the operational safety of banks so that Vietnam's banking system
can withstand external and internal shocks of the economy. In 2016, the SBV picked up
top ten pilot banks to implement the Basel II standard. Due to the application, these
24
banks are possible to reduce up to 3 percent for CAR requirement. Specifically, the
present CAR is 10 percent, higher than 2 percent comparing with standard Basel II. May
Vietnam banks has fulfilled the requirement. For example, Vietnam Prosperity Bank,
Asia Commercial Bank has achieved the Basel II requirement. From the point of view, it
is necessary to test the listed banks have enough capital to reach the international
business standard, which supported bank operation to remain a certain level of cash to
cover operational and market risks (Barth et al. 2013). However, it raised the concern
about the capital deficit of banking systems equaling to 9% GDP to meet the
requirement capital of Basel II under Circular 13 and arise underlying deposit asset
problems (Hanoi Times 2019).
The development of the Vietnamese banking industry and its performance has been
examined by many studies, including market reports from international financial
institutions (WB or IMF) as well as individual researchers (Ngo and Tripe 2017; Stewart
et al. 2016). In particular, Stewart et al. (2016) revealed that, in Vietnam, small and
medium-sized banks were less efficient than large and very large banks, and the small
banks had the lowest efficiency ratings. Therefore, the nation has fragile economy and
easily to collapse by the affection of global crisis. Through investigating the relationship
between loan and deposit in the context of the Financial Crisis, the study will carry out
the method of sustain capital ratio through Basel II application. Since then, the banking
institute will improve the level of deposit and strength the relationship between loan and
deposit.
2.5.4 The changes of Bank Capital Regulation in the Basel III
25
In response to the credit crisis, banks required to maintain an appropriate level and
meet specific capital requirements. There Basel Committee on Banking Supervision in
response to the financial crisis of 2007-2009 has introduced the Basel III model at the
end of 2009 (Berger et al. 2015). By then, banks require to remain the certain liquid ratio
and obtain the bank regulatory requirements. In the scale of this research, changes in
bank capital regulation focus on the improvement of the three pillars in term of reserved
capital requirements, liquidity risk ratios.
In case of revised capital requirements, the Basel I and II simplicities the capital
requirement based on risk weight of asset with a fixed ratio that leads to the trouble of
unfair to scale the risk of assets (Khwaja and Mian 2008). For example, the risk weight
of asset for big corporations equalling to the small-scale companies as long as in the
same type of assets. Basel III creates a solution by increase the minimum reserved
capital. In specific, the reserved tier I capital requires at least 6% higher than the Basel
II at 4%. The change requires the bank to hold a higher level of money and exceptional
quality to recover for unexpected events.
The other limitation of Basel I and II are that these models concentrated on ensuring
financial institutions sustains its capital to defend risk is undertaken (Barth et al. 2013).
However, The Financial Crisis points out the liquid risk is the primary concern for The
Global Financial Crisis. At that time, banks operate rolls-over debt by short-term
financial contracts to fund activities. For example, the case of Northern Rock which the
bank relied on the short-term loan. A borrower could loan extent their financial capacity
for the short of periods. After a specific time, the bank has difficulties in rolling over the
commercial paper, leading to the financial crisis. Basel III has provided two formula to
26
scale the convertible asset within 30 days or a year in the economic disruption. By the
way, the financial institutions could improve liquidity ratio by remain stable capital to limit
the inconsistent period between assets and liabilities.
The impact of the Basel III reforms
There are many reasons for regulatory reform, such as the financial scandal, political
pressure, commercial invention, globalisation, etc. In case of UK, The Global Financial
Crisis 2007-2009 strongly influenced the financial institutions and revealed a wide range
of restriction calling for regulatory reform. Basel III reforms have applied successfully
and considered to become a compulsory model for the multinational banking systems in
the European countries (Parise & Shenai 2018). The study of Barth et al. (2013) found
out that reforms strengthen liquidity and defending systematic risks by regulatory
frameworks. The following contents explained the role of the Basel III reforms on Bank
Capital Regulations.
The model of Basel III has two main targets, such as extended flexibility of the bank by
strengthening bank regulatory capital and increasing liquidity ratio. The other goal
relates to remaining bank funds during the difficult financial circumstance to defend the
system risk over the business economy. In the research of McNamara et al. (2014), the
Basel III reforms built up generated regulations to minimise forecast banking systematic
risks by upgrading current regulations. Therefore, the model supports the increase the
resilience to strengthen liquidity ratio of financial institutions during the financial
pressure. In the macro effect, it helps to recover the whole bank sector by reducing
future systematic risks and specified regulations. One of another impact of Basel III
regards to its participant in redesign the balance sheet structure. The business ethical
27
issues in complying with regulations raise the question about one party taking all the
profit and passing the potential risks of rising cost for their partners. Therefore, the
reform model of Basel III will classify a specific role for the party to balance their rights
and obligations in the financial contracts. However, it raised an argument about the
impact of the Basel III framework in the Bank Capital Regulation cannot resolve
systematic and operating problems. The model could not ensure strict supervisory, only
create alliance environment for engaging nations (Schnabl 2012). It seems like the
governance structures have designed as a pattern to treat the financial system the
same way. The arrangements should custom based on the size and significance of
business enterprises to extend their investment revenue.
Chapter 3: Methodology
In this section an insight is provided in terms of the methodology that is applied in this
study, including research propositions, research design, data collection, reliability and
validity and case analysis.
3.1 Research objectives
The purpose of this study is to examine the relationship of loan and deposit in light
of the Financial Crisis. Since then, applying the CAR model to understand effectiveness
of strengthen capital could reduce the systematic risk. It also sustains the deposit
amount and attracted more loan borrowers. In order to be able to achieve this objective
and to find answers to the specific research questions raised in chapter one, the
following objectives are of interest to this study:
28
- Support Vietnamese financial institution to set new regulation for loaning and
deposits more efficiently.
- Verify and give new empirical proof about the correlations between loaning and
deposit in light of the financial crisis.
- List of factors create positive impact on the performance of CAR.
In Addition, the main hypothesizes of the paper concentrates on three main point
below:
- H1: the correlation between deposit and loan during the Financial Crisis?
- H2: the impact of deposit and loan on the bank size through total asset
value?
- H3: which factors create positive impact on the performance of CAR?
3.2 Research method
The study of Groves et al (2011) highlighted that the process of research approach
supporting the test hypothesis and answer the research questions. In the study of
Sauders and Clark (2006), there were the two main categories of the research method
including deductive and inductive approach. Particularly, the inductive method reviews
from detailed analyst to give overall perspectives and assumption. In the other hand, the
deductive approach prefers to the general information to the specific conclusion.
To prove the relationship between the loan and deposit in light of the Financial Crisis,
the report focused on test the relationship between the dependent variables such as the
total deposit ratio (DEPOSITRATIO) and the total loans ratio (LOANSRATIO) on
banking operations through the total assets ratio (ASSETRATIO). Moreover, it also
29
investigates on element affecting the CAR performance through Equity Over Total Asset
(ETA), bad debt as non-performing loans ratio (NPLRATIO), Returns Over Equity
(ROE), Returns Over Assets (ROA) (Bateni et al. 2014).
By the way, the deductive approach applied to give the general point of views then
insulting the specific conclusion. The implementation of deductive approach is suitable
to examine the connection of variables, in this case, investigating the link between
deposit and loan under the global financial crisis. Cover by the topic area, the deductive
method gives the access to prove the correlation between variables.
3.3 Research design
Research design is a plan that guides the investigator in the process of collecting,
analysing and interpreting observations. It is a logical model of proof that allows the
researcher to draw inferences concerning casual relations among the variables under
investigation (Yin 2003). Therefore, the research adopted the deductive approach to
give outer perspective reviews then particular result (Saunders et al. 2012). It explained
Jonker and Pennink (2010) that researcher and implement hypothesizes and test the
results through a research approach. It causes of the deduction method performance
unique functions such as examining the relationship between variables, therefore the
connection between the loan and deposit factors will classify. Based on the topic area,
the deductive method is going to investigate to prove the positive connection between
independent and dependent variables.
3.4 Research method
30
The segment concentrated on finding the research approach to collect different types
of data in order to analyze the relationship between variables to prove the research
topic. In the past paper of Bell (1999), the author highlighted the two main categories of
data including qualitative and quantitative types. Particularly, the application of
qualitative data matches with researches does not use the numbers such as interviews,
theoretical data and words (Saunders and Clark 2006). Besides, the quantitative
method is suitable for the case of numerous research with the data analysis function.
Regarding the topic area, the quantitative data seems like the best match to cover the
research topic including test the relationship between the deposit and loan, showing the
change in the requirement of deposit capital regulations during the Financial Crisis. By
the way, the method of quantitation utilised the relationship between the two factors
such as deposit and loan before and after the Financial Crisis. It proved by Mackey and
Gass (2015) about the benefit of quantitative research in the collection and analyses
illustrative data.
3.5 Data collection
3.5.1 Source of data
In general, two types of data sources are recognized in theory, namely primary and
secondary data. Whereas primary data is collected by the researcher itself, secondary
data already exists and the researcher is not involved in the collection of it, so the
research is analysing pre-existing data (Sachdeva 2009). Through review secondary
data of banking institutes and official global database to pick up relevant data for testing
relationship between two variables such as loan and deposits. The type of date
31
presented to the past researches, reports and reading by other authors and scholars,
which involved with the topic of the paper. Regarding to the research area, secondary
data provisions to answer the research questions and cover the objectives (Saunder et
al. 2012).
The database is extracted from “the resources for research: A Vietnamese Banking
Database” by Ngo and Le (2017). The sources of data also used in the research of Le
(2017) and Nguyen et al. (2019). From list of available data (table 1), there was 44
sampling from different types of banks in Vietnam to clarify the hypothesis of the
research during and after the Financial Crisis in the period of 2008-2015.
Table 1: List of avaiable data
Bank code 2008 2009 2010 2011 2012 2013 2014 2015
ABB 1 1 1 1 1 1 1 1
ACB 1 1 1 1 1 1 1 1
AGB 1 1 1 1 1 1 1 1
BIDV 1 1 1 1 1 1 1 1
BVB 1 1 1 1
CB 1 1 1 1
CTG 1 1 1 1 1 1 1 1
DAB 1 1 1 1 1 1 1
EIB 1 1 1 1 1 1 1 1
FCB 1 1 1
GAB 1 1 1 1 1
GPB 1 1
32
HBB 1 1 1 1
HDB 1 1 1 1 1 1 1 1
HSBC 1 1 1 1 1 1 1
IVB 1 1 1 1 1 1 1 1
KLB 1 1 1 1 1 1 1 1
LVB 1 1 1 1 1 1 1 1
MB 1 1 1 1 1 1 1 1
MDB 1 1 1 1 1 1 1
MHB 1 1 1 1 1 1 1
MSB 1 1 1 1 1 1 1 1
NAB 1 1 1 1 1 1 1 1
NCB 1 1 1 1 1 1 1 1
OB 1 1 1 1 1 1
Obs. 1 1 1 1 1 1 1 1
OCB 1 1 1 1 1 1 1 1
PGB 1 1 1 1 1 1 1 1
PNB 1 1 1 1 1 1
PVB 1 1 1
SCB 1 1 1 1 1 1 1 1
SEAB 1 1 1 1 1 1 1 1
SGB 1 1 1 1 1 1 1 1
SHB 1 1 1 1 1 1 1 1
STB 1 1 1 1 1 1 1 1
TCB 1 1 1 1 1 1 1 1
33
TNB 1 1 1
TPB 1 1 1 1 1 1 1 1
VAB 1 1 1 1 1 1 1 1
VBSP 1 1 1 1 1 1 1
VCB 1 1 1 1 1 1 1 1
VCPB 1 1 1 1 1 1 1 1
VIB 1 1 1 1 1 1 1 1
VPB 1 1 1 1 1 1 1 1
WEB 1 1 1
Grand Total 41 44 44 40 38 37 35 31
Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)
3.5.2 Data type
Since the research area concentrated on the relationship of the deposit and loan in light
of The Global Financial Crisis. It is important to use the reliable resources for the most
effective and accurate result. Therefore, the data from secondary sources conducted to
serve the purpose of the study to reflect the financial situation of the bank through the
Crisis and the adjustment for the capital requirement to secure the transaction and
avoiding economic bubbles. By the performance of the secondary database, it could
highlight the trend of growth for both variables throughout the different timing events
(Saunder et al. 2012). All of the secondary data collected from the official government
resources such as General Statistical Office and global data resources such as World
Bank and UNCTAD, etc.
34
3.5.3 Sampling
This investigation uses the pooled cross-sectional case statistics of 52 financial
institutions accommodated and practised in Vietnam between 2008 and 2015 by the
sources of the secondary data. The currency of all statistics is in VND and deflated
adopting the Consumer Price Index (CPI) derived from the database of the World Bank.
Distinct features between the accounting principles and criteria of financial institutions
may happen. This includes the Vietnamese Accounting and International Financial
Reporting Standards (IFRs and VASs); however, those distinct features are not
fundamental to this examination, because, since 2011, VASs had started to employ
IFRSs (Ngo and Tripe 2017). In general, there are up to 5 large scale banks and up to
39 smalls in the case
3.6 Analysis and model
The study of Maxwell (2012) pointed out the efficient study present clearly the data
analyst supporting to the trustable outcomes which prove the literature framework and
research objectives. Therefore, analysis process plays a vital role in the implementation
of the methodology. In scope of the thesis, the data analysis part presents to test the
relationship between the two variables such as deposit and loan. In which, the analyst
process applied the univariate analysis to the model (Creswell, 2003). The type of
analysis is to classify the strength of relationship between deposit requirement and
qualified loans before and after the Financial Crisis
3.7 Ethical issues
35
Since the secondary data will use for the research analyst, it is important to achieve the
access permission. To do that, the research requires to present the sources of
information through reference list with the public data. If the data are privacy or limited
access, the requested approval for the authors need to be attach with the research
paper. All collected data served for the purpose of this research only and not used for
other reason (Tripathy 2013). The data file required to keep in a locked folders and not
update online
3.8 Limitation
As presented above, the method of deduction and secondary data collect used in the
scale of research. It raise the concerns about the lack of updated information. In
addition, the original purpose of collecting secondary data in the first place was not for
the research area as well the conflict between different data sources may cause of the
inaccurate result. Moreover, the case of research also used the quantitative approach,
which limited the ability to expand research in case of non-numerous data. There is no
measure to test the legality of the data. Therefore, the information is less reliability and
limited to present within the topic area. The further research should include different
type of approach such as both primary and secondary data to increase the liability of the
outcome
Chapter 4: Results
After analyst the data set, this chapter listed it the key information to support the
strength of the research objectives and hypotheses. Through summary tables, the
highlighted data is going to investigate and consider.
36
4.1 Deposit and loan ratio on the bank performance
4.1.1 Descriptive data
From table 2, even the sampling collected from the same market with similar
economic conditions, it still presents the diversity of the estimating method. For
example, the range of total assets represents for the bank scale between 1.4 trillion
VND to 875 trillion VND. The size of sample is kind of wide spread with the median
at 51 trillion VND in the total asset. Regarding to the percentage of criteria, the rate
of deposit differed significantly with the scale between 3 percent to 26 percent. In
addition, the loan ratio performed similarly with the deposit rate with the scale
between 2.5 percent to 27 percent in the total value. In which, the average rate of
deposit and loan was at 2.6 percent. Moreover, the asset ratio presented the small
scale of range of 21.5 percent running between 6 percent to 22 percent. However,
the average asset ratio of the banking institutes was at 2.6, equaling the ratio of
deposit and loan.
DEPORATI
O
LOANRATI
O
ASSETRATI
O TASSETS
Mean 2.638 2.634 2.642 108,783,039
Standard Error 0.233 0.246 0.205 8,994,406
Median 1.161 0.977 1.411 51,121,922
Mode 2.190 1.444 2.366 -
Standard
Deviation 4.062 4.301 3.586 156,306,106
Sample 16.498 18.496 12.856 -
37
Variance
Kurtosis 8.130 8.654 5.856 7
Skewness 2.747 2.880 2.429 3
Range 25.498 26.895 21.540 873,328,185
Minimum 0.035 0.025 0.064 1,479,142
Maximum 25.533 26.921 21.604 874,807,327
Sum 804.737 803.522 805.683
32,852,477,64
8
Count 305 305 305 302
Table 2: Descriptive statistic of deposit, loan and asset variables.
Source: the author calculation
4.1.2 Summary output of Regression Statistics
From the R square test, the table 3 showed the value of 0.98, which presents the
excellent fit of the database. It explained 98 percent of the total asset variables
affected by the independent variables such as total deposits and loans ratio. If the
result of regression statistics test for R square closed to 1, the regression line
matches with the data.
Regression Statistics
Multiple R 0.988
R Square 0.976
Adjusted R
Square 0.976
Standard Error 0.557
38
Observations 305
Table 3: Summary output of the R Square test for deposit, loan and asset ratios.
Source: the author calculation.
4.2 Elements impact on performance of Capital Adequacy Ratio.
4.2.1 Descriptive statistics.
From the table 4 of descriptive statistic, the average of Deposit Ratio was at 2.60% with
the range between 0.04% to 25%. The Loan Ratio numbers achieved the minimum
value of 0.03% from TPB and the maximum number of 27% from AGB in the period of
2008-2015. In which, the average level of credit risk in Vietnam was around 53%. The
level of Return On Assets rate presented the fluctuation in between -5.99% of LVB to
5.95% of TPB, resulting the average value at 1.03% throughout the period. Regarding
to the level of Return On Equity, AGB achieved the first rank with the number of 39.20%
and the lowest performance belonging to -56.32% during the research time. The
average ratio of ROE during the research period was 9.1% with the standard deviation
of 7.92%. The Equity Over Total Assets ratio achieved its best performance at 66.07%
and its lowest one at 0.39% with the average value of 12.20%. Capital Adequacy Ratio
ranges between the lowest value of 4.8% of the VPB bank to the highest value of 18.5%
belonging to VBSP during the seven years. The variables illustrate the mean and
standard deviation at 11.52% and 3.02%, respectively.
DEPORAT LOANRAT ROA ROE ETA CAR
39
IO IO
Mean 2.638 2.634 1.039 9.108 12.209 11.520
Standard Error 0.233 0.246 0.056 0.454 0.520 0.172
Median 1.161 0.977 0.887 8.128 9.517 11.870
Mode 2.190 1.444 - - - 14.500
Standard
Deviation
4.062 4.301 0.983 7.926 9.089
3.012
Sample
Variance
16.498 18.496 0.967 62.828 82.614
9.074
Kurtosis 8.130 8.654 12.560 15.425 9.673 -0.688
Skewness 2.747 2.880 0.362 (1.056) 2.652 -0.359
Range 25.498 26.895 11.945 95.529 66.075 13.700
Minimum 0.035 0.025 (5.993) (56.326) 0.390 4.800
Maximum 25.533 26.921 5.952 39.202 66.075 18.500
Sum 804.737 803.522 316.91
3
2,777.82
9
3,723.64
1
3,513.57
1
Count 305 305 305 305 305 305
Table 4: Descriptive statistic of deposit, loan, ROA, ROE, ETA, CAR variables
4.2.2 Summary output
From the summary table, the value of R square was at 0.39, which mean the
regression line does not perfectly match with the database (table 5). The regression
statistic test does not close to 1, raising the trustable issues for the relationship
between dependent and independent variables. Therefore, the regression line could
40
not build up based on this method.
Regression Statistics
Multiple R 0.628
R Square 0.394
Adjusted R Square 0.384
Standard Error 2.364
Observations 305
Table 5: Summary output of the R Square test for CAR factors
Chapter 5: Discussion
The part includes all of the data analysis and translate it into words to further
observations and clarifications. It aims to present the understand for the data results
and significance. It helps to prove the strength of the statements, to find out
disadvantage of the results and explaining unforeseen results.
5.1 The relationship between deposit and loan in term of banking operation
5.1.1 The total amount of deposit and loan during 2008-2015
The figure 2 observed that the change in term of total deposit and loan over the 2008-
2015 period. In which, the growth rate of total deposit and loan of banking institutes in
Vietnam was slow during the Financial Crisis. It presented that the total amount of
deposit achieved around 1,2 trillion VND in 2008 and reached to 4,4 trillion VND in
41
2015, equaling to 3.8 times higher than the previous quantity. While the amount of loan
was at 1,1 trillion VND in 2008 and obtained 3.7 trillion VND in 2015, which mean 3.4
times higher in the sum of total loans.
2008 2009 2010 2011 2012 2013 2014 2015 -
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
Sum of Total Deposits Sum of Total Loans
VND billion
Figure 2: the trend of total deposit and loan in the period of 2008-2015.
Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)
In addition, the growth of the total deposits and loans achieved the best performance in
the beginning of the Crisis. The figure 3 described through the strong growth of 30%
and 42% YoY of deposits and loans in 2009, respectively. Unfortunately, both of the
ratios dropped down dramatically during the Disaster by the presentation of 10% and
12% YoY of the deposits and loans in 2011. At the end of research period, the
percentage of the two factors stably raised at 15% YoY.
From the above analyses, the total amount of deposit and loan increased together over
different periods. It supported by the research of Bellando and Lavigne (1992) about the
link of improvement between deposit and loan ratios. Moreover, the other study of
42
Ewing et al. (1998) also highlighted the balance between the total deposit and lending
rate causing of stable rate for the bank in the long term within international competition.
Therefore, if Vietnam banks has enough capacity, they could increase the higher
income through unusual revenues for the short term deposit and loan.
2008 2009 2010 2011 2012 2013 2014 20150%5%
10%15%20%25%30%35%40%45%
25%30%
32%
10%
23% 21%18%
15%
23%
42%
31%
12% 12% 14%11%
15%
YoY Deposits YoY Loans
Figure 3: the growth rate of total deposit and loan during 20087-2015.
Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)
According to investopedia (2020), Loan-to-Deposit Ratio (LDR) presented the level of
liquidity of the bank in term of total deposit and loan within certain period. Therefore, the
equation will use to illustrated the ratio of LDR throughout the research time with the
equation of:
LDR = Total loanTotaldeposit
From the figure 4, the Loan to Deposit Ratio (LDR) calculated from the total loan divided
the total deposit. Particularly, the LRD achieved 93% in 2008 and reduced to 84% in
43
2015. From the LDR, the liquidity of the bank could be explained by the difference
between the total loans and the total deposit during the same operating time. From the
case the banking institutions in Vietnam, the LDR peaked at the strongest affective
period of the Financial Crisis in the 2011 with 103%. Through that ratio, it presented the
lack of liquidity of the bank for covering unexpected events, which already happened as
the side-effect of the Financial Crisis. After that, the ratio dropped down from 94% to
84% during the post Crisis in the 2012-2015. It reflected the banks were incapable to
earn as its capacity.
Even the all of the sample data from the same market but there is diversification in scale
of estimating between banks. In which, bank size highlighted the total assets with
different scale from 1,400 billion to 874 trillion VND. However, most of the bank
appeared in the small scale with less than 10,000 billion VND in the value. The total
assets ratio distributed widely from 0.06 percent to 21.6 percent. The equity over total
deposit illustrated at high number with the average of 26.9 percent in the range between
3.4 percent to 309 percent. With the high ratio of the loan to deposit ratio, it also results
the high level of the liquidity of the liquid assets over the deposit ratio with the range
between 7.9 percent to 526.6 percent. Plus, the liquid asset over total assets valued
between 0.79 percent to 81.59 percent and achieved the average level of 30.13
percent.
In term of bad debt, different bank achieved various non-performing loans ratio running
between 0.02 percent to 91.85 percent during the period of 2008 – 2015. Regarding to
the loan loss provision ratio, the banking industry presented the rate between 0.05
44
percent to 5.1 percent over the period. The other ratios should consider including the
equity over total deposits with the value between 3.4 percent to 309.5 percent.
2008 2009 2010 2011 2012 2013 2014 201580%
85%
90%
95%
100%
105%LDR
Figure 4: LDR ratio during the research period.
Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)
5.1.2 In term of deposit and loan ratio on the bank assets
The ratio of deposit and loan over the period presented the same ratio with 2.5% in the
2008 and end with 3.33% in 2015 as shown in figure 5. During the financial crisis in
2008-2012, the total deposit and loan ratio showed the slightly improvement with only
0.2% within the four years. After that, the ratio experienced better performance by 0.6%
increasing in the period of 2012-2015. The collapse of the two ratios offered the similar
presentation of the loan and deposit growth rate during the research period. Based on
the theory of Sealey and Lindley (1977), the role of loan amount such as outputs and
45
deposit with acting as the financial inputs. Nevertheless, the financial institution focused
on reducing the input orientation and increasing the level of output through loan
accounts to improve the business revenue. However, the strongly increase and
imbalance between input-output orientation may lead to increase of non-performing
loans and lack of liquidity ratio.
2008 2009 2010 2011 2012 2013 2014 2015 -
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2.50 2.33 2.33 2.56 2.70 2.78 2.94
3.33 %
Figure 5: the deposit and loan ratio during 2008-1015.
Source: Ngo and Le (2017) from State Bank of Vietnam (www.sbv.gov.vn)
Regression line about the link of deposit and lending ratio on the bank performance
- Significance F and P-values
In the table 6, to test the reliability of the statistically significant, the ANOVA test for the
Significance F applied. With the result of Significance F (0.000) < 0.05, which mean the
value of the set of independent variables was trustable and suitable to carry for the next
step. Moreover, all the P-values was at 0.000 presents for the Significance F outcomes
at 0.000
ANOVA
46
df SS MS F Significance F
Regression 2.000 3814.427 1907.214 6138.541 0.000
Residual 302.000 93.830 0.311
Total 304.000 3908.257
Coeff
icient
s
Standar
d Errort Stat
P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Asset
ratio0.388 0.038 10.150 0.000 0.312 0.463 0.312 0.463
Deposit 0.466 0.035 13.328 0.000 0.397 0.535 0.397 0.535
Loan 0.389 0.033 11.759 0.000 0.324 0.454 0.324 0.454
Table 6: ANOVA test and coefficients of asset, deposit and loan ratios.
Coefficients
The regression line was y = total asset = 0.388 + 0.466*deposit + 0.389*loan.
Based on the regression equation, when there is the improvement in level of deposits or
loans at 0.466 unit and 0.389 units, total asset will raise at 0.388. It reflects the positive
relationship of the deposit and loan to enhance the bank size through the performance
of total assets.
After reviewing the model, it presented the relationship between the dependent variable
such as asset ratio and the independent ratio such as the deposit and loan ratio through
the application of regression and T-test. With the R2 level at 97.6%, resulting the
perfect fit for the regression formula. In which, there is 97.6% of the dependent value
complying with the presentation of the independent variables. As the result in the table
47
6, the variables could explain as:
- The regression outcome indicated the remarkable positive relationship between the
Asset Ratio and the Deposit Ratio. In which, when the increase of 0.46% in the
deposit ratio will lead to the improvement of 0.39% in the asset ratio. Moreover, the
p-value equals to 0.000, this leads to the effect in the asset rate at α = 0.05.
- The observed analysis illustrated the strongly positive relationship between the
Asset Ratio and the Loan Ratio. It revealed the p-value equals to 0.000 with the
significant F = 0.000 supporting to the accept of the hypothesis. It means the loan
level directly impact on the performance of asset ratio.
Correlation
- Relationship between the Deposit and Loan Ratios.
Through analyst the correlation of the deposit and loan in the context of bank size
through the asset ratio in the table 7. It reflected the strong relationship between the
two variables with the correlation at 0.97. It explained the connection between the
deposit and loan in the context of financial banking systems in Vietnam. The result
followed the research of the Chang and Su (2010) about the positive correlation
between the lending and deposit ratio in the content of Western nations. By the way,
building up the error detective system frameworks to evaluate the change in the
relationship between the loan and deposit rates will support for the bank
performance. Similarly, the empirical result also followed the study of Enders and
Siklos (2001) about the relationship between the short term lending rate and the
deposit rate. However, the theory of Enders and Siklos (2011) may appear the
disadvantage since the author conducted data from the period before the Financial
48
Crisis. Moreover, the research of Nguyen et al. (2018) showed the perfect match
with the result by the similar research period and sample size. The authors also
agreed on positive relationship between the deposit and the loan performance
throughout the Financial Crisis. However, the strong linkage between the two
variables leads to the concern about the quality loan and managing the bad debts
through the non-performing loan by the increasing of the deposit rate.
- Relationship between the Deposit and Loan Ratios on the Asset Ratio.
As shown in table 7, the correlation between the Deposit and the Loan Ratio created
strong positive impact on the performance Asset Ratio. It reflected through the
correlation rate a 0.98 for both of Deposit and Loan Ratio on the Asset rate. It
clarified that the liquidity ratio of the bank could improve through the operation of
loan performance and consumer deposits. In the research of (Berg 2012), the raise
in customer deposit leads to the progressively complying on the market fund. When
the consumer deposit could not catch up with the level of deposit, it caused of
deposit amount injected from the market assets, leading to negative impact on the
commercial strength. The market funding resources mostly come from foreign
financial enterprises, which was unstable and threaten the liquidity ration by external
impacts. It was one of the reason for the fall of the global financial institutions in the
crisis in 2008-2015 (Deltratti and Stulz 2012).
DEPORATI
O
LOANRATI
O
ASSETRATI
O
DEPORATIO 1
LOANRATIO 0.974 1
49
ASSETRATIO 0.982 0.981 1
Table 7: the correlation between Deposit, loan and asset ratio.
Covariance
From the table 8, it showed the level of covariance between the Deposit Ratio and Loan
Ratio reached 16.97 for the strength of relationship between the two variables. Similarly,
the Asset Ratio presented strong connection with Deposit Ratio, Loan Ratio with 14.26
and 15.07, respectively.
DEPORATI
O
LOANRATI
O
ASSETRATI
O
DEPORATIO 16.444
LOANRATIO 16.965 18.435
ASSETRATIO 14.260 15.074 12.814
Table 8: the covariance between Deposit, Loan and Asset Ratio.
5.2 the factors effect on the Capital Adequacy Ratio (CAR)
5.2.1 the CAR level in Vietnam comparing with the global standard.
The implementation of CAR supported business operation to understand the
relationship between equity stocks and the risks adjusted portfolios. Through the
performance of the Basel Committee, the CAR could perform accurately and security in
the context of fluctuated economy. Up to now, the CAR has internationally standardized
and become the one of the most well-known capital funding models.
In scale of figure 6, the CAR level of the Vietnam banking market always achieved
higher capital in comparing with the Basel Committee Standard for Basel II and III from
50
2008 to 2015. Specifically, the average CAR ratio of the banks in Vietnam reached
8.84% in 2008 and 11.80% in 2012 under basel II requirement, respectively. The ratio
increased in the Basel III requirement with the average level of 12.14%, 11.65% and
11.87% in 2013,2014 and 2015, respectively. Regarding to the report of National
Financial Supervisory Commission (NFSC 2016), CAR ratio dropped sharply if Basel II
was applied. According to the NFSC, the minimum capital adequacy ratio (CAR) of the
whole banking system higher than the ratio of adjusted tier 1 capital / total assets. The
results of applying Basel 2 capital adequacy standards at the 10 pilot credit institutions
showed that the CAR decreased sharply compared to the current reports, mainly due to
increased risky convertible assets. For the four state-owned commercial banks, the
reported CAR is now close to 9%. If the system applies Basel 2, this rate will drop below
8%. However, if the State commercial banks group cannot raise capital in the near
future, while ensuring a minimum CAR, it will strongly affect the credit growth plan of the
group as well as the credit growth of the whole industry. From there, it has an impact on
economic growth in the period 2016 - 2020 because this group has an important role
and a strong influence on the entire banking system.
51
2008 2009 2010 2011 2012 2013 2014 2015Basel II Basel III
02468
101214
8.84 8.7810.07
11.80 11.80 12.14 11.65 11.87
Standard Total Capital Average of CAR in Vietnam%
Figure 6: Comparison between standard CAR requirement and average CAR of
Vietnam under Basel II and III.
Source: Standard Total Capital from Biondi and Graeff (2020). Average of CAR in
Vietnam from annual financial reports.
Regression analysis about the factors impact on the CAR performance in Vietnam
- Significance F and P-values
To test the reliability of the statistically significant, the ANOVA test for the Significance F
applied. With the result of Significance F (0.000) < 0.05, which mean the value of the set
of independent variables was trustable and suitable to carry for the next step. As
presented in table 9, the p-value of ROE and ETA were at 0.000 presents for the
Significance F outcomes at 0.000. Therefore, the ROE and ETA will select to add in
formula.
ANOVA
df SS MS F Significance F
Regressi 5. 1,087.0 217.4 38. 0.
52
on 000 91 18 897 000
Residual
299.0
00
1,671.3
04
5.
590
Total
304.0
00
2,758.3
95
Coeffici
ents
Standa
rd Errort Stat
P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
CAR 8.234 0.339 24.275 0.000 7.566 8.901 7.566 8.901
Depo
sit0.262 0.158 1.656 0.099 (0.049) 0.572 (0.049) 0.572
Loan (0.223) 0.145 (1.545) 0.123 (0.508) 0.061 (0.508) 0.061
ROA 0.432 0.321 1.347 0.179 (0.199) 1.064 (0.199) 1.064
ROE 0.144 0.037 3.846 0.000 0.070 0.218 0.070 0.218
ETA 0.117 0.024 4.892 0.000 0.070 0.163 0.070 0.163
Table 9: ANOVA test and coefficients of deposit, loan, ROA, ROE, ETA, CAR
variables.
Coefficients
The regression line was y = total asset = 8.234 + 0.144*ROE + 0.117*ETA.
Based on the regression equation, when there is the increase in term of Returns Over
Equity and Equity Over Total Assets at 0.144 unit and 0.117 units, total asset will raise at
8.234. It presented the positive relationship between the variables when it appears the
improvement in term of ROE and ETA.
53
Regarding to the equation, the connection between the independent values such as
Deposit, Loan and Returns Over Assets (ROA) and Return Over Equity (ROE) and
Equity Over Total Assets (ETA) and the dependent ratio such as Capital Adequacy Ratio
(CAR) have analysed. The R square ratio presented at 39.4%, which presented the
slight fixed of regression line with the data set. From table 7, the relationship between
variables could explain as below:
- The study outcome illustrated the negative relationship of the CAR and deposit level
through p-value 0.099 which higher than 0.005 while the significant F at 0.000. By
the case, the connection between the CAR and deposit ratio rejected through the
null hypothesis. By the way, the change of deposit amount in the banking operation
could not affect the total required capital (El-Ansary and Hafez 2015).
- In term of the Loan Ratio, there is negative connection between the Capital
Adequacy Ratio with the rate. In which, the p-value appears at 0.123, which reject by
the over 0.05. Therefore, the coefficient between the two factors was contrast.
Particularly, when the bank capital increase 8.23%, the Loan Ratio reduces at 0.22%
in the average.
- The empirical result presented the negative relationship between the CAR and the
ROA by the p-value at 0.179 is higher than the 0.05 level, therefore, the connection
between the two variables rejected. in addition, when the capital of the banking
institutions increased 8.23%, the level of Return Over Assets raised 0.43% during
the research period. It supported by the research of Phuong et al. (2019) about the
ROA creating positive impact on the capital adequacy ratio.
- The research outcome specifies the dramatically positive relationship between CAR
54
and the ROE level. The p-value equal to 0.000, which presented for the contribution
of significant F at 0.000. By the way, when the capital level increased at 8.23%,
leading to the improvement of ROE at 0.14%. it matched with the research of
(Zopounidis and Kosmidou 2008) about the positive relationship with ROE bringing
the profit for the bank performance.
- There is the strong relationship between the Capital Adequacy Ratio and the Equity
Over Total Asset level. It matched with the study result of Phuong et al. (2019) about
ETA on eventually linking with the CAR standard. In which, the increase of CAR at
8.23%, resulting the improvement of ETA at 0.12% during the period of 2008-2015.
Therefore, it reflected the strong linkage of the equity and capital level of the banking
institutions in Vietnam.
Correlation matrix
As can be seen in table 10, the adequate capital (CAR) presented the positive
relationship with all variables such as Deposit Ratio (DEPORATIO), Loan Ratio
(LOANRATIO), Returns Over Assets (ROA), and Returns Over Equity (ROE) and Equity
Over Total Assets (ETA). However, the correlation matrix between the CAR with
DEPOSIT RATIO and LOAN RATIO were at low level of 0.039 and 0.005, respectively.
It contrasts with the theory of Bateni et al. (2014) about Deposit and Loan Ratio caused
of positive relationship with the CAR. Through the correlation matrix, it highlighted that
the higher ROA and ROE, the higher CAR. In which, the correlation between CAR and
ROA, ROE resulted highly at 0.568 and 0.458, respectively. It followed the study of
Bateni et al. (2014) about the positive relationship between CAR and ROA, ROE.
DEPORATI LOANRATI ROA ROE ETA CAR
55
O O
DEPORATIO 1
LOANRATIO 0.974 1.000
ROA -0.082 -0.092 1.000
ROE 0.341 0.303 0.686 1.000
ETA -0.342 -0.347 0.473 -0.117 1.000
CAR 0.039 0.005 0.568 0.458 0.364 1.000
Table 10: The correlation matrix of the variables.
Covariance
The covariance of CAR with other variables presented positive number, which means
the increase in CAR also lead to the gain of others in the table 11. To be specific, the
covariance between CAR with Deposit, Loan, ROA, ROE, ETA and CAR obtained 0.47,
0.06, 1.68, 10.9, 9.93 and 9.04, respectively. With all of positive results of covariance,
presenting the same direction fluctuation of the variables.
DEPORATI
O
LOANRATI
O ROA ROE ETA CAR
DEPORATIO 16.444
LOANRATIO 16.965 18.435
ROA -0.328 -0.387 0.964
ROE 10.938 10.310 5.326 62.622
ETA -12.598 -13.537 4.217 -8.434 82.343
CAR 0.478 0.061 1.676 10.900 9.934 9.044
Table 11: the covariance between Deposit, Loan, ROA, ROE, ETA and CAR level.
In general, the discussion part for the relationship between deposit and loan on the
56
banking operation successfully highlighted the strongly bond between variables. Even
during the Financial Crisis, the total amount and growth rate of deposit and loan
achieved optimistic performance through the difficult period. Financial institutions in
Vietnam performed efficiently with professional operational implementation by remaining
a balance level of Loan Over Deposit from 2008 to 2015 in term of deposit and loan
perspectives. Then, the relationship between the loan and deposit presented strongly
through the high level of correlation test. It reflected the replication of each factors on
the other trend. Moreover, the two independent variables including loan and deposit
created the strongly linkage with the asset ratio performance. Since then, it assumed
that the bank size and level of asset of individual banking institutions affected by the
operation of the loan and deposit amount during the implementing process. Then, the
important factors which may impact on the level of bank’s capital has investigated. In
the result, the value of Return Over Equity and Equity Over Total Assets presented the
strong impact on the level of capital requirement among the banking enterprises in
Vietnam in scale of the research.
Chapter 6: Conclusion
In conclusion, the research has investigated the key objectives and hypothesis to prove
the topic area. The main targets of the research are that the Vietnam financial
organizations are able to set suitable regulation for deposit, loan and capital to avoid the
future financial damages. The other target the relationship between the loan deposit as
well as the factors affecting on the requirement capital in the Vietnam financial field
throughout the Financial Crisis. By then, the researched conducted the secondary
databases from 44 different types of banking in Vietnam during and after the Financial
57
Crisis in 2008 to 2015 in explain the key areas and hypothesis of the study. The main
hypothesis focused on investment the correlation between deposit and loan
performance during the Global Financial Shock. The next hypothesis regarded the
impact of deposit and loan on the bank size through the rate of asset within banking
system. The last hypothesis represented the factors could bring the strong growth for
the banks through influencing on the required capital ratio.
Firstly, to prove the research aims and theories, the literature review carried out the
overview of banking industry in Vietnam and macro factors caused of the Financial
Crisis. Then, the review of previous researches about the correlation relationship
between deposit and loan elements has addressed. After that, the research found out
that the Basel Committee has issued the Basel II and III as attempt to defend the future
economic shock. Therefore, list of factors which may lead to potential influence on the
CAR performance also took into account.
Secondly, to test the hypothesis, the research conducted the secondary databases from
44 different types of banking in Vietnam during the Financial Crisis in 2008 to 2015 in
explain the key areas and hypothesis of the study. Then, it adopted the connecting
between the lending and deposit in Vietnam. After that, the factors affected on the
performance of Capital Adequacy Ratio also carried out for sustaining implemental
operation after the Financial Crisis. The results of the relationship between deposit and
lending rate with the impact on the bank size; plus, the factors contributed for the CAR
illustrated as below:
The relationship between deposit and lending rate
Both of the deposit and loan achieved strong growth rate even in the Financial Crisis.
58
However, there was concern about the LDR by the fluctuation growth of the ratio. The
analytical result revealed the lack of liquidity standard by the high ratio of LDR during
the Financial Crisis of the banking system in Vietnam. In addition, the ratio dropped
down after the Economic Shock illustrated the lack of capacity to maximum productivity.
After running hypothesis tests, the result came out that the economic deposits created
strong positive impact in the lending operation in order to improve business operation in
context of Vietnam. The regression result appeared good fit with the zero value in both
Significance F and P-value, resulting contribution for the regression line. The correlation
relationship between the deposit and loan variables was extremely solid. Moreover, it
highlighted that both of total deposit and total loan grew during the difficult financial
period in the past. The research pointed out the important in the reverse effect of loans
on deposit plays an important role to achieve the good business performance, which
focused on the customer deposits since the bank could sustain its funding and
remained wealthy level of liquidity. Based on the regression equation, it pointed out the
same trend of the deposit, loan and asset. It supported for the theory about the deposit
and loan ratio improve the bank scale through the performance of the total assets. By
the way, the liquidity rate of the bank could enhance through increasing of deposit and
loan factors. However, the strong linkage between variables could be negative when the
deposit injection came from foreign sources. It established the potential risk of liquidity
and unstable capital.
The factors impact on the level of CAR
First of all, the comparison between the international standard for Basel Il and III applied
to compare with rate of actual CAR in Vietnam. It resulted average CAR of Vietnam
59
always presented higher than the Standard Capital requirement, which reflected strong
performance of the bank to secure liquidity ratio. The growth of capital funding attributed
for the invested capital regarding to the Core Tier 1 Capital under the Circular 13 of the
State bank’s regulations. By the way, the banks could be able to limit the capital risk
management and the capacity of the adequacy capital ratio. Therefore, the higher level
of capital, the better performance which bank could achieve to hence the capital risk.
Nevertheless, the State Bank announced that the commercial banks enterprises should
not increase the level of capital in the future since it could harm the credit flows between
the banking institutions.
There were different factors brought into the analysis for presenting the relationship
between CAR with Deposit Ratio, Loan Ratio, ROA, ROE and ETA in scale of the
research area. Firstly, the level of deposit presented negative relationship with CAR.
Firstly, the data showed that deposit ratio statistically negative impact on the level of
adequate capital. It presented the limited funding resources for capital in case of
Vietnam, leading to the negative effect in the deposit performance. It may cause the
negative impact in the individual deposits by the inefficient performance the bank.
Secondly, the loan rate also appeared the negative relationship with the capital
adequacy. This factors required the bank to pay attention on the feature of capital
toward the depositors to defend collapse. Next, the other factors engaged into the
analyst which is the Return of Assets, appearing the negative relationship with the level
of capital funding El-Ansary and Hafez (2015). The rate presented the bank
performance through its earning ability on the available assets. Even there was the
negative gesture on the bank operation, the operators could attempt to increase the
60
profit or reduce the total asset. Then, the relationship between Return of Equity and the
Capital Adequacy presented positive. Through the strict regulation of the State Bank in
Vietnam, the firm forced to increase the level of capital to match with the standard.
However, the high level of equity may directly reduce the earning capacity of the bank.
Therefore, the improvement of the ROE may increase the capital sources. The last
empirical result presented the positive connection of the Equity Over Total Asset and the
CAR level. Aiming to remain the high rate of capital, the bank normally enhanced their
equity budget.
Recommendation
The new set of data could be more motivating by analyzing the liquidation ratio to
measure the operational effectiveness within different types of banks in Vietnam Berger
and Bouwman (2009). In addition, the researches limited the dataset from annual
financial reports which lacked of the external audit reviews. Therefore, the quality of
database could improve through further studies of bigger set of database and other
elements including in the bank operation. Moreover, the Government should set up the
specific regulation and strict application dossiers for the foreign investors to prove their
engagement and financial ability with the local business market to avoid tax avoidance.
When there are signal of issues for certain reasons, the banks tend to recheck all the
risky factors. Therefore, banking system hedged the faults, which may harm the degree
of capital adequacy.
In term of sufficiency capital, Vietnamese business banks should set up regulation for
capital raising guide with specific plans for investment structure, thinking about great
key accomplices, which effectively apply Basel Model to improve the brand reputation.
61
The banks should have prepared money and take a satisfactory influence in insecure
condition for Basel III application. Furthermore, these institutions additionally build up
great models for the effective merger and acquisition operation. Since then, the SBV
should think about an appropriate period to totally apply Basel II and Basel III into the
financial business. The banks characterization technique and capital ampleness
equation ought to be considered. Next, the SBV improves operational management
system to ensure the banks' investors' correct. To sum up, leading hypothetical explores
about impacts of a bank's default on money related division and the entire economy
also may encourage the SBV's choice towards undesirable business banks. In the
further researches, the other authors should indicate different sort of banks about
comparing the with other oversea banking enterprises in developed nations. Since then,
the domestic banks could improve the performance and cope with the global trends.
Word Count: 13,571.
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