[Podcast] The role of macro-prudential policy towards credit growth in Vietnam
14 August, 2024
Keywords: Credit growth, macro-prudential policy, cycle, credit boom, ratio of short-term capital to medium and long-term loans, Vietnam
In recent years, many countries have been experiencing boom cycles in credit and asset prices – one of the causes that has led to financial crises. To limit the negative impact that can occur due to the credit boom cycle, policymakers have used prudent macro policies (Macro-prudential Policy) as the first line of defense against financial instability risks. This research by a group of authors from University of Economics Ho Chi Minh City (UEH) was conducted to provide empirical evidence on the impact of macro-prudential policies on credit growth, the credit growth cycle, and credit allocation in the Vietnamese market.

Macro-prudential policy is understood as the rules, the laws, and the conditions for the operations of banks and institutions established by state management agencies, to protect the entire financial system from risk. Macro-prudential policies are designed to identify and minimize risks to systemic stability, thereby helping the economy avoid the risk of disruptions in financial services, ensuring the smooth functioning of the system. efficient operation of the market. The new regulations on macroprudential policy in the banking sector reflect the regulators’ awareness of the main risks exposed during the crisis, and a deeper understanding of the concepts systemic risk. A typical example of macro-prudential policy is the regulations of Basel III or the Dodd-Frank Act (issued by the US) to force financial corporations to comply with general supervision standards that were previously considered internal to this organization to avoid systemic risks.
Measuring and evaluating the impact of a country’s macroprudential policies presents many challenges for researchers. The process of evaluating the effectiveness of these policies becomes even more complex when more than one tool is enabled. Managers need to effectively analyze the specific objectives for which macro-prudential policies are designed while these policy objectives and instruments are diverse in nature and there is no common approach for all. In addition, most macroprudential policies aim to control and limit systemic risks whereas this type of risk is endogenous in nature. To date, there has been no consensus on methods for measuring the extent to which regulators are meeting these goals. Macroprudential policy is, therefore, more difficult to measure than monetary policy. The number of monetary policy tools is also much smaller than that of the toolkit of macro-prudential policy. Therefore, the important issue is how a clear framework can be established to effectively measure and evaluate a country’s macroprudential policies.
For countries where bank credit is still an important resource to promote economic growth like Vietnam, the tools for monitoring credit growth are always a top concern. Because it is established based on the manager’s perspective, the actual effectiveness of each macroprudential control tool has been being debated. In this study, the authors built a representative macroprudential policy index (MPI) for Vietnam, with 41 component indicators, belonging to the 10 basic indicator groups in accordance with the suggested indicator groups of the fundamentals of macroprudential policy of the Bank for International Settlements (BIS, 2008); This index is used as one foundation for the analysis of the relationship between macroprudential policy and real credit growth as well as the combined impact of macroprudential policy and monetary policy towards the real credit growth, credit cycle and credit allocation in the Vietnamese market through January 1999 to June 2023. An MPI value closer to 1 represents a state of tightening macro-prudential policy whereas this closer to 0 represents a complete loosening of macro-prudential policy.
The research results indicate that the general trend of Vietnam’s MPI index gradually increased towards 1 during the observation period, implying that prudent macroeconomic policies are increasingly tightened. Comparing the MPI index with the interest rate tool of monetary policy indicates that there has been a divergence between the interest rate tool and the macroprudential policy tool since April 2014. The State Bank of Vietnam during this period loosened monetary policy but tightened prudent macroeconomic policy tools. Among the 10 groups of component indicators, the authors found that Vietnam’s macro-prudential monitoring tools mainly focus on the group of liquidity risk control, controlling lending rates based on guaranteed resources or assets, and centralized risk control. In particular, since 2012, the State Bank of Vietnam has used diverse tools and implemented tightening policies, which is also the general trend of emerging economies in the world. During the period 2020-2022, during the Covid 19 pandemic, the macro-prudential policy tools index decreased (easing) but remained at a high level. Basically, the State Bank of Vietnam has been being in the trend of tightening prudent macroeconomic policy tools.
The study also found the evidence assessing the impact of macroprudential policies on actual credit growth and the real credit growth cycle in Vietnam. The results from the empirical model show that macroprudential policy tools are effective in controlling real credit growth; nevertheless, there is no evidence of their effectiveness in helping to counter-cyclical real credit growth.
The ratio of short-term capital for medium and long-term loans is a very specific prudent macro-economic tool in the Vietnamese market. The experimental model results demonstrate that reducing the ratio of short-term capital to medium and long-term loans effectively controls domestic credit growth; concurrently, the amount of credit shifts from other business areas to the industrial, commercial and telecommunications sectors.
From the results of empirical research, the authors found that the State Bank’s use of prudent macroeconomic monitoring tools can support the control of credit growth and credit boom. However, these tools need to be adjusted to achieve the counter-cyclical goal. Among the 10 groups of macro-prudential policy tools surveyed, many groups of tools are in a completely relaxed state (not applied yet) listed as the group of tools related to risk measurement. In addition, the group of tools related to transparency and disclosure of information on financial reports and the group of compliance with international capital management standards (listed as Basel 2, Basel 3) also need to be strengthened.
Furthermore, in the current and future periods, Vietnam has more and more links with other countries in the region and the world markets. According to the general trend, most countries have specific macro-prudential supervisory regulations; therefore, the cooperation among these countries to create a common supervisory framework and to ensure compliance by domestic financial institutions and foreign financial institutions in the domestic market needs to be emphasized. Bilateral compliance agreements can help limit credit institutions’ attempts to circumvent supervisory regulations when conducting multinational business. Financial technology, also a new field, is becoming increasingly popular; other commercial banks are also involved in creating products in accordance with financial technology, along with lending activities of financial companies, can also create risks to the financial system. Therefore, policymakers need to pay attention to those subjects under the prudent macroeconomic supervision, including new business sectors.
Please refer to the full researcj titled The role of macro-prudential policy towards credit growth in Vietnam HERE.
Author group: Dr. Đinh Thi Thu Hong, Dr. Nguyen Huu Tuan, Prof. Dr. Tran Ngo Tho, Asoc. Prof. Dr. Tran Thi Hai Ly– University of Economics Ho Chi Minh City (UEH).
This is an article in a series of articles spreading research and applied knowledge from UEH with the message “Research Contribution For All – Research For The Community”, UEH respectfully invites dear readers to look forward to upcoming newsletter UEH Research Insights.
News and photos: Author group, UEH Department of Marketing and Communications

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