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Macroeconomic Condition And Banking Industry Performance In Indonesia

Author

Listed:
  • Mahjus Ekananda

    (University of Indonesia)

Abstract

The ratio of non-performing loan (NPL) and capital adequacy ratio (CAR) is still a measure of bank soundness in various countries including Indonesia. Interdependence acros bank’s condition, diversity of the size, market structure within banking industry, and macroeconomic variables, may be very complex and dynamic. This paper utilizes the advantage of PVAR model on capturing this complexity to analyze the dynamic relationship between the macroeconomic variables and the soundness of the banks. The result shows NPL of banks with small asset will increases rapidly when interest rate fluctuates. For banks with large asset, the increase in interest rates leads to larger reduction on their CAR. On the other hand, the result shows banks with smaller capital are less able to adapt quickly to an increase in NPL due to exchangerate depreciation, therefore banks with smaller capital should be cautious about the exchange rate risk.

Suggested Citation

  • Mahjus Ekananda, 2017. "Macroeconomic Condition And Banking Industry Performance In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 20(1), pages 71-98, July.
    • Handle: RePEc:idn:journl:v:20:y:2017:i:1c:p:71-98
    DOI: https://doi.org/10.21098/bemp.v20i1.725
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    More about this item

    Keywords

    Credit; PVAR; Banking; Interest Rate; Exchange Rate;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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