Do banks respond to capital requirements? Evidence from Indonesia
AbstractUsing dynamic panel data models, and addressing a common inappropriate use of simultaneous equation models in the literature, we examine the effect of capital requirements on banks' behaviour in Indonesia. We find that banks tend to comply with capital requirements by increasing their capital ratios when the ratios are lower than, or falling towards, the 8% regulatory minimum. However, our results are mostly driven by large private-domestic banks and heavily undercapitalized banks that were closely monitored by the regulator in the aftermath of the 1998 crisis. Therefore, whether in normal circumstances banks in Indonesia comply with capital requirements remains questionable.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 21 (2011)
Issue (Month): 9 ()
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Web page: http://www.tandfonline.com/RAFE20
Other versions of this item:
- Rasyad A. Parinduri & Yohanes E. Riyanto, 2007. "Do Banks Respond to Capital Requirement? Evidence from Indonesia," Finance Working Papers 21932, East Asian Bureau of Economic Research.
- Rasyad A Parinduri & Yohanes E. Riyanto, 2007. "Do Banks Respond to Capital Requirement? Evidence from Indonesia," SCAPE Policy Research Working Paper Series 0712, National University of Singapore, Department of Economics, SCAPE.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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