Cash holdings and bank profits in periods of uncertainty

Abstract

Purpose

The paper explores the effect of cash holdings on bank profitability in the context of uncertainty.

Design/methodology/approach

Through data on Vietnamese banks from 2007 to 2019, the author measures uncertainty in banking using the dispersion of bank-level shocks and perform dynamic regressions using the generalized method of moments (GMM) and the least squares dummy variable correction. The author uses different measures to comprehensively evaluate bank profitability, including the net interest margins (NIMs), the returns on assets (ROA) and the returns on equity (ROE)

Findings

The author documents that more cash holdings reduce bank profits when the uncertainty level is low; however, there is a high uncertainty point at which holding further cash improves bank profitability. Thus, the findings reveal the importance of cash management for banks in times of high uncertainty.

Originality/value

This paper is the first to shed light on the impact of cash management on bank profitability while paying close attention to the moderating role of uncertainty. Accordingly, the author indicates the marginal effects of cash holdings on bank profits according to uncertainty levels via drawing plots from interaction terms between continuous variables. This approach exploits all the information exhibited in the interactive variables and hence considerably deepens the understanding of our estimates.

Citation

Dang, V.D. (2023), "Cash holdings and bank profits in periods of uncertainty", Journal of Economic Studies, Vol. 50 No. 2, pp. 343-356. https://doi.org/10.1108/JES-01-2022-0034