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22 J. Banking Reg. 1 (2021)

handle is hein.journals/jlbkrg22 and id is 1 raw text is: Journal of Banking Regulation (2021) 22:1-10 https://doi.org/l 0.1057/s41261-020-00123-3 ORIGINAL ARTICLE Banking, transition and financial reforms: a long-term analysis of Vietnam Alessandra Ferrari' - Vo Huyen Trang Tran' Published online: 10 February 2020 © Springer Nature Limited 2020 Abstract We analyse the effectiveness of financial reforms in the transition economy of Vietnam, from the early years until the present day. Our focus is on the changes and the determinants of banks cost efficiency, which was widely criticised and was the focus of the reforms package. We find that regulatory changes impact favourably the development of the sector. Technological and efficiency improvements characterise the period of analysis, helped by better capitalisation and increased diversification. Any technological spillovers from foreign banks are quickly transferred to the domestic market, and larger domestic banks rapidly become the best performing institutions, in support of the more recent liberalisation and privatisation policies. Keywords Financial reforms - Transition economies - Vietnam banking sector - Banks efficiency - Stochastic frontier JEL Classification G21 - G28 - D24 - C49 Introduction This paper analyses the changes in cost efficiency and their determinants for Vietnam commercial banks over the period 1992-2017. The time period is the longest ever analysed for the country and runs from the early years of transition, when Vietnam abandoned the mono-tier banking system, through two big financial crises and significant financial reforms. Liberalisation and re-regulation policies were introduced in response to widening criticisms about the inefficiency and unprofitability of the sector and to meet the requirements related to the country's joining the WTO in 2007. Regula- tory changes are still ongoing to increase banks efficiency, stability and competitiveness, as a key to the continued eco- nomic growth of the country. Despite all the changes and the growing economic relevance of this ASEAN country, very little academic attention has been given to it, which leaves an important gap in the literature. In this paper, we ana- lyse if and how banks cost efficiency has indeed increased Alessandra Ferrari a.ferrari@lboro.ac.uk Vo Huyen Trang Tran v.h.t.tran@lboro.ac.uk School of Business and Economics, University of Loughborough, Loughborough LE113TU, UK over the period of analysis and evaluate a series of potential determinants of such changes. This allows us to draw clear policy implications about the effectiveness of the reforms Vietnam embarked upon. We contribute to the literature in several respects. To the best of our knowledge, this is the first paper to comprehensively analyse the dynamic changes of Vietnamese banks efficiency as well as its determinants, something which has been largely ignored by extant litera- ture. Our very long time span (the years from 1992 to 2017), previously unexplored, runs from the very early years of economic and financial reforms through to the more recent reforms and two major financial crises. This allows us to formulate more robust conclusions about the long run trends and their determinants in the sector. From a methodological point of view, we estimate a stochastic cost frontier with the simultaneous estimation of efficiency determinants, while controlling for various environmental and bank-specific fac- tors. This stochastic one-step approach is an improvement on existing work on Vietnam which uses mainly determinis- tic and/or 2-stage approaches, whose limitations are widely recognised in the efficiency literature (as discussed later). Furthermore, unlike other literature we control for several bank-specific variables and for environmental factors. Our results show technological improvements and cost efficiency increases throughout the period of observation. Fast improvements are seen at the beginning, possibly *

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