The Impact of Monetary Policy on Bank Profitability and the Moderating Role of Funding Patterns in Vietnam

Abstract

The study investigates the effect of monetary policy on bank profitability while also taking into account the moderating role of bank funding patterns. Uniquely, the study focuses on disaggregate components of bank profits in an environment containing various monetary policy tools. Using a dataset of commercial banks in Vietnam, the results show that monetary policy drives bank profitability asymmetrically. Concretely, interest rates (i.e., lending rates and policy rates) exert positive effects on net interest income, but negative impacts on non-interest income. For quantitative-based policy tools, including the central bank’s security purchases and foreign exchange reserves, monetary policy is positively correlated with non-interest income but negatively associated with net interest income. The reaction of banks’ net interest income to monetary policy adjustments is translated into overall bank profits. Further analysis indicates that the monetary policy/bank profitability nexus across different proxies is less pronounced at banks with more diversified funding patterns. This finding sheds light on prior arguments attributing financially weaker banks’ greater sensitivity in facing monetary shocks to the limited alternative funding.