Title: The impact of liquidity creation on bankruptcy risk: evidence from banks listed on Vietnam stock market

Authors: Luu Thu Quang

Addresses: Ho Chi Minh University of Banking, 36 Ton That Dam Street, District 1, Ho Chi Minh City, Vietnam

Abstract: This paper investigates the relationship between liquidity creation (LC) and bankruptcy risk (BR) among banks listed on the Vietnam stock market by using alternative regression methods. The study finds a negative relationship between LC, based on both on and off-balance sheet activities, and banks' bankruptcy. Large banks showed a significant increase in their liquidity generation capacity over the past decade, while small banks remained relatively stationary. The study's models are robust, using alternative proxies of BR and controlling for potential endogeneity. The analysis also revealed that small banks primarily create liquidity through off-balance sheet activities, whereas large banks focus on on-balance sheet activities. The results also suggest that stock return volatility is positively correlated with the risk of bankruptcy, and bank size has a significant positive relationship with BR. The paper's findings are significant for various stakeholders. Investors can evaluate the financial distress risk of banks before investing, while partners can assess credit risk before providing capital. Internal managers can also identify issues related to bank default probability.

Keywords: bankruptcy; liquidity creation; LC; Z score; on-balance sheet liquidity creation; off-balance sheet liquidity creation; LCOFF.

DOI: 10.1504/GBER.2025.145246

Global Business and Economics Review, 2025 Vol.32 No.3, pp.255 - 281

Received: 09 Dec 2022
Accepted: 02 Jun 2023
Published online: 31 Mar 2025 *

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