Financial freedom and bank performance: Moderating role of monetary tools, governance characteristics and business strategies in a transition economy

Abstract

This study examines the effect of financial freedom on bank performance within the setting of Vietnam's economic liberalization, covering the period 2009–2022. The analysis reveals that financial freedom significantly enhances bank performance in a transition economy. Specifically, increased financial liberalization fosters greater bank efficiency through the monetary policy regulation of Vietnam's State Bank, a finding consistent with both interest‐based and quantitative monetary tools. In addition, this paper identifies that commercial banks with state ownership and larger board size exhibit diminished performance, whereas those with longer‐serving CEOs and higher educational attainment demonstrate superior outcomes under conditions of improving financial freedom. Further, Vietnam's commercial banks with more diversified income streams and less diversified funding structures tend to achieve stronger performance during periods of financial liberalization. In contrast, elevated credit risks are associated with reduced bank performance as financial freedom soars. These findings provide nuanced understandings of the bank performance‐driven dynamics within the context of Association of Southeast Asian Nations’ financial integration and liberalization in a transition market. Beyond enriching the existing empirical literature on financial liberalization and banking efficiency, this study offers meaningful and actionable policy implications for the State Bank of Vietnam, Vietnam's macroeconomic regulators and bank executives.