Impacts of Financial Development on Vietnamese Commercial Banks’ Lending Mechanisms of Monetary Policy Pass-Through: Bayesian Analysis

The research focuses on the driving role of financial development (represented by financial institution development) in the responses of bank loan supply to monetary policy shocks in Vietnamese commercial banks for the period of 2007–2019. The results from Bayesian analysis indicate that there is strong evidence for the presence of a bank lending channel of monetary policy transmission, which is in line with previous research on other developing countries. This might underline the bank-based economy of Vietnam, which is best suited to the transmission of diverse instruments of monetary policy via banks’ granted loan supply. Furthermore, the greater the progress of financial development, the weaker the bank lending channel through which monetary policy can pass-through. This can be explained by the reduction in loanable funds of commercial banks, which may be replaced with external financing sources originating from the progress of financial markets or potential banking innovations. These findings remain qualitatively identical across indexes of financial development (especially an aggregate financial development indicator through principle component analysis) and a broad palette of monetary policy instruments. Given these findings, policy-makers could take into account the role of financial development when a banking system-based economy inevitably becomes more mature with diverse instruments for the need of financing and investment.