The COVID-19 pandemic and financial stability in Vietnam: evidence from the interbank market

PurposeThis study investigates the impact of the COVID-19 pandemic on financial stability in Vietnam, a developing country characterized by a bank-based financial system.Design/methodology/approachUsing a sample of daily data from January 23, 2020 to June 30, 2022, the VECM and NARDL models are employed to study Vietnam's financial stability in face of the COVID-19 disaster. Following the literature on COVID-19, the authors measure the impact of the pandemic by the number of daily infected cases and the national lockdown. Given the reliance of the Vietnamese government on the banking system to regulate the economy, the authors evaluate financial stability from the interbank market and stock market perspectives.FindingsThe authors find that the pandemic imposes a destructive effect on financial stability during the early time of the pandemic; however, the analysis with an extended period indicates that this effect gradually fades in the long term. In addition, from the NARDL results, the authors reveal an asymmetric relationship between the financial market and the COVID-19 pandemic in both short term and long term.Research limitations/implicationsAn implication drawn from this study is that unprecedented health disasters should be resolved by unprecedented stringent countermeasures when conventional methods are ineffective. Although rigorous remedies may increase short-term liabilities, their implementation quickly ceases disease diffusion and helps an economy enter the recovery stage in a timelier manner.Originality/valueThe study is the first to examine the impact of the COVID-19 pandemic on financial stability, via the interbank market lens, in a developing country that relies on the bank-based financial system.