Digital Transformation and Bank Liquidity Creation: Evidence From a Bank-Based Market

This study explores how digital transformation influences the ability of Vietnamese commercial banks to generate liquidity, utilizing panel data from 2007 to 2022. We adopt rigorous econometric methodologies, including dynamic panel models estimated via the generalized method of moments (GMM) and instrumental variable (IV) techniques, to address potential endogeneity. The analysis reveals that digital innovation in banking significantly boosts liquidity provision through assets, liabilities, and off-balance-sheet instruments. Moreover, the four facets of digitalization—technological infrastructure, skilled personnel, internal system upgrades, and online customer interfaces—all exhibit positive effects on liquidity creation. These outcomes remain robust after applying multiple econometric strategies to mitigate endogeneity concerns. Heterogeneity analysis indicates that banks with diverse operations benefit more from digital advances in terms of liquidity generation. Furthermore, the relationship between digitalization and liquidity creation intensifies in more competitive banking environments and becomes particularly evident during the COVID-19 pandemic, whereas the global financial crisis does not notably alter this linkage.