Impact of Geographical Diversification on Bank Liquidity: Empirical Evidence from Vietnamese Commercial Banks

Abstract

This study investigates the effects of geographical diversification on liquidity within Vietnamese commercial banks from 2008 to 2023. Using panel data regression methods, including fixed-effects regressions to measure the relationship between bank liquidity, geographical diversification, and control variables, the generalized method of moments (GMM) to address endogeneity issues, and quantile regression to assess whether this interaction differs across different quantiles of bank liquidity, we present empirical evidence regarding the relationship between bank liquidity and geographical diversification. These findings indicate that geographical diversification reduces bank liquidity, as banks expanding into various locations complicate liquidity management due to differing economic conditions and regulations. Furthermore, inefficiencies in monitoring and resource allocation among geographically dispersed branches may intensify liquidity limitations, necessitating the adoption of strong risk management measures by banks. Nonetheless, for banks that have an abundance of liquidity, much of the adverse effect is ameliorated compared to those with less liquidity, suggesting that banks experiencing low liquidity would find it more difficult to manage liquidity across branches that are spread over a wide area. The study provides important practical implications for bank management and policymaking, including (i) developing stricter risk management strategies when expanding bank branch networks to maintain stable liquidity and (ii) establishing appropriate supervisory frameworks to mitigate liquidity risks arising from geographical diversification.