Bankruptcy risk, banks’ balance sheet under uncertainty in Vietnam

The study employs bank-level data in Vietnam during 2007 - 2019 to measure micro uncertainty in banking through the dispersion of bank-level shocks to estimate the relationship between uncertainty and the changes in banks’ balance sheets. Empirical estimations are performed using the two-step generalized method of moments (Generalized Method of Moments - GMM) estimator and then verified using the least squares dummy variable corrected (Least Square Dummy Variables - LSDVC) technique. As a result of higher uncertainty, banks tend to reduce risky loans, hoard more liquidity, and decrease financial leverage. The relationship between uncertainty and banks’ balance sheet reactions is more pronounced for banks that suffer more credit risk and overall risk, thus supporting the precautionary motive of banks.