Capital buffer and bank risk-taking in Vietnam: the moderating role of capital regulation and shadow banking

Purpose This paper aims to investigate the impact of capital buffer on risk-taking in the Vietnam banking sector as well as examine the moderating role of capital regulation based on Basel II standards and shadow banking on this correlation. Design/methodology/approach The capital buffer is measured by the bank’s capital adequacy ratio minus the regulatory capital adequacy ratio, whereas risk-taking is the inverse value of the Zscore indicator. To test the hypotheses, the two-step system generalized method of moments estimation and a data set for the period 2010–2022 were used. Findings This study reveals the U-shaped nonlinear impact of capital buffer on bank risk-taking, which means that maintaining high capital buffer forces Vietnamese banks to reduce risky activities, but when the capital buffer is thick enough to resist unexpected shocks, an additional level of capital buffer may lead to excessive risky behaviors. The regression outcomes also explore the moderating role of capital regulation based on Basel II standards and shadow banking. To be specific, applying capital regulation following Basel II has caused banks to behave more cautiously and enhance the negative impact of capital buffer on bank risk-taking, whereas engaging in shadow banking activities has caused them to increase risk tolerance and diminish the negative impact of capital buffer on risk-taking. Originality/value This study bridges the gap in the literature regarding the impact of capital buffer on bank risk-taking in a typical emerging market. Especially, the article explores evidence that capital regulation and shadow banking play as moderators between two main interest variables.