Regulatory pressure and lending discipline: evidence from non-performing loan supervision in Vietnam

Abstract

Although growing concerns have been raised over increasing nonperforming loans (NPLs) in emerging markets, empirical evidence remains limited on the effectiveness of regulations implemented for NPL resolution. This study examines whether the enforcement of the State Bank of Vietnam’s (SBV’s) supervision of NPLs plays a regulatory role in shaping self-disciplinary lending behavior and assesses whether the SBV’s regulatory threshold represents an optimal point for Vietnamese banks.5 Using a threshold regression model and panel data from 27 Vietnamese commercial banks from 2013–2023, we identify an optimal NPL ratio threshold of < 3%, which aligns with the SBV’s supervisory benchmark. The risk–return trade-off becomes invisible when banks maintain NPL ratio under this threshold. However, if NPLs exceed this threshold, Vietnamese commercial banks become more cautious, accepting lower short-term returns and decreasing credit growth, reflecting a disciplinary effect from regulatory oversight. Our main results remain consistent after robustness checks. These results highlight the importance of regulation in mitigating risk and enhancing the stability of the banking system by providing empirical evidence on the effectiveness of the SBV's NPL threshold-based supervision in shaping the self-discipline of bank behaviors in emerging markets. In addition, this study extends signaling theory by identifying a regulatory NPL threshold as a negative signal sent to stakeholders.