Does digital transformation reduce bank's risk-taking? : evidence from Vietnamese commercial banks

This study examines whether digital transformation reduces banks' risk-taking in the Vietnamese commercial banking sector. Our research sheds light on how banks' digital transformation affects their risks, specifically regarding credit, insolvency, and liquidity. The study utilizes the readiness index for the Vietnamese commercial banks' Information and Communication Technology (ICT) Index, which the Vietnamese government has officially constructed. The OLS, PCSE, and FGLS models are employed to analyze how digital transformation reduces banks' risk-taking based on the longitudinal data from 26 commercial banks in Vietnam from 2013 to 2022. The results indicate that digital transformation significantly reduces credit risk by improving risk management capacity and reducing asymmetric information. It also helps mitigate insolvency risk by lowering costs and increasing profitability. However, digitalization does not significantly impact liquidity risk as digital channels leverage banks' lending and deposit activities. This research provides empirical evidence on the role of bank digitalization in risk-taking and concludes with recommendations for developing bank digital transformation in Vietnam and other developing countries, including suggestions for further research in this area.