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The Determinants of Capital Buffer in Indonesian Banking

Author

Listed:
  • Agustinus Prasetyantoko

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

  • Wahyoe Soedarmono

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

Using monthly data of 99 commercial banks during the period 2004-2007, we investigate whether capital buffer can be explained by bank-specific, business cycle, regulatory and institutional variables. In regards to the business cycle, we find evidence that bank capital buffer is procyclical. These finding becomes different, if we divide banks into two sub-groups according to bank size and market involvement. More importantly, larger banks and listed banks more involved in market activities, tend to increase their capital buffer during economic booms, but reduce it during economic downturns. These findings have regulatory implications for the Basel II implementation in Indonesia, notably in solving its procyclicality. For instance, small banks consolidations and supporting banks to more involve in market activities, as well as market discipline enforcement, become necessary. This paper also reveals that higher non-interest income enhances capital buffer.

Suggested Citation

  • Agustinus Prasetyantoko & Wahyoe Soedarmono, 2010. "The Determinants of Capital Buffer in Indonesian Banking," Post-Print hal-00785102, HAL.
    • Handle: RePEc:hal:journl:hal-00785102
    as

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