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The Changing Relationship Between CAMEL Ratings and Bank Soundness during the Indonesian Banking Crisis

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  • Gasbarro, Dominic
  • Sadguna, I Gde Made
  • Zumwalt, J Kenton
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    Abstract

    During the recent Southeast Asian financial crisis, numerous banks failed quickly and unexpectedly. This study uses a unique data set provided by Bank Indonesia to examine the changing financial soundness of Indonesian banks during this crisis. Bank Indonesia's non-public CAMEL ratings data allow the use of a continuous bank soundness measure rather than ordinal measures. In addition, panel data regression procedures that allow for the identification of the appropriate statistical model are used. We argue the nature of the risks facing the Indonesian banking community calls for the addition of a systemic risk component to the Indonesian ranking system. The empirical results show that during Indonesia's stable economic periods, four of the five traditional CAMEL components provide insights into the financial soundness of Indonesian banks. However, during Indonesia's crisis period, the relationships between financial characteristics and CAMEL ratings deteriorate and only one of the traditional CAMEL components--earnings--objectively discriminates among the ratings. The panel data results indicate systemic economy-wide forces must be explicitly considered by the rating system. Copyright 2002 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 19 (2002)
    Issue (Month): 3 (November)
    Pages: 247-60

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    Handle: RePEc:kap:rqfnac:v:19:y:2002:i:3:p:247-60

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. BATRANCEA, Ioan & STOIA, Ioan & CSEGEDI, Sandor & MOSCVICIOV, Andrei & NICHITA, Anca & ANDONE, Diana, 2013. "Econometric Model For Default Risk In Banks," Academica Science Journal, Economica Series, Dimitrie Cantemir University, Faculty of Economical Science, vol. 1(2), pages 35-43, May.
    2. Wei-Kang Wang & Wen-Min Lu & Yu-Han Wang, 2013. "The relationship between bank performance and intellectual capital in East Asia," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(2), pages 1041-1062, February.
    3. Mundaca, Gabriela, 2008. "Monitoring, Liquidity and Financial Crises," MPRA Paper 20501, University Library of Munich, Germany, revised 01 Oct 2009.

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