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Tri-Cycles Analysis on Bank Performance: Panel VAR Approach

Author

Listed:
  • Denny Irawan

    (Researcher, Institute for Economic and Social Research, Faculty of Economics, University of Indonesia, Jakarta)

  • Febrio Kacaribu

    (Researcher, Institute for Economic and Social Research, Faculty of Economics, University of Indonesia, Jakarta)

Abstract

The financial crisis of 2007/8 has revealed the importance of risk, besides credit, in the dynamics of financial cycle and business cycle in the economy. This study examines relationship among those three cycles in the economy (Tri-Cycles), namely (i) business cycle risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance. We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle risk and its consequence to the bank performance. We use Indonesian data for period of 2002q1 to 2014q4. We use unbalanced panel data of individual banks’ balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by implementing PVAR package developed by [1]. The result shows dynamic relationship between business cycle risk and financial risk cycles. The study also observes prominent role of risk cycles in driving bank performance. We also show the existence of financial accelerator phenomenon in Indonesian banking system, in which financial cycles precede the business cycle risk.

Suggested Citation

  • Denny Irawan & Febrio Kacaribu, 2017. "Tri-Cycles Analysis on Bank Performance: Panel VAR Approach," LPEM FEBUI Working Papers 201707, LPEM, Faculty of Economics and Business, University of Indonesia, revised Jul 2017.
    • Handle: RePEc:lpe:wpaper:201707
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    Cited by:

    1. Chao Li & Mian Wu & Wenli Huang, 2023. "Environmental, Social, and Governance Performance and Enterprise Dynamic Financial Behavior: Evidence from Panel Vector Autoregression," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 59(2), pages 281-295, January.
    2. Phan, Dinh Hoang Bach & Narayan, Paresh Kumar & Rahman, R. Eki & Hutabarat, Akhis R., 2020. "Do financial technology firms influence bank performance?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).

    More about this item

    Keywords

    Business Cycle Risk — Credit Cycle — Bank Lending — Financial Risk;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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