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The Impact Of An Increase In Capital Adequacy Regulation On The Interest Rate Spread Of Banks Using Accounting-Based Analysis

Author

Listed:
  • Ndari Suryaningsih

    (Bank Indonesia)

  • Tevy Chawwa

    (Bank Indonesia)

  • Reni Indriani

Abstract

This research aims to conduct an early estimate on the impact of capital adequacy policy change on bank’s interest rate spread using accounting relationship-based simulation approach to the balance sheet and income statement of a representative bank. Research result shows that 1 percent of capital adequacy ratio (CAR) increase can be covered by increasing interest rate spread of 6 basis point (bps). The calculation result is obtained from the assumption that return on equity (ROE) and bank borrowing cost do not change as well as there are no changes in the bank’s total assets and non-operational cost. If ROE and borrowing cost are assumed to be changing, the impact on interest rate spread will be smaller. Using the same method for representative bank based on BUKU, it shows that BUKU 1 needs the smallest lending spread increase (1 bps), while BUKU 4 needs the largest lending spread increase (32 bps). The factor affecting differences in the impact of an increase in capital adequacy regulation is the current bank’s ROE. The higher an ROE, the higher interest rate spread increase which is needed

Suggested Citation

  • Ndari Suryaningsih & Tevy Chawwa & Reni Indriani, 2015. "The Impact Of An Increase In Capital Adequacy Regulation On The Interest Rate Spread Of Banks Using Accounting-Based Analysis," Working Papers WP/5/2015, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp052015
    as

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    References listed on IDEAS

    as
    1. Swamy, Vighneswara, 2014. "Modelling the Impact of New Capital Regulations on Bank Profitability," MPRA Paper 58298, University Library of Munich, Germany.
    2. Ruthenberg, David & Landskroner, Yoram, 2008. "Loan pricing under Basel II in an imperfectly competitive banking market," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2725-2733, December.
    3. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banks; regulation; Basel III; capital; liquidity; lending spreads;
    All these keywords.

    JEL classification:

    • 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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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