Do Banks Respond to Capital Requirement? Evidence from Indonesia
AbstractUsing dynamic panel data models, we examine the effect of capital requirement on banks’ behavior in Indonesia. We find inconclusive results. Some banks tend to comply with capital requirement: They increase their capital ratio when their CAR is lower than, or falling towards, the eight percent regulatory minimum. However, most of our results are statistically significant at 20-30% level of significance only. Moreover, our results are mostly driven by private domestic banks and heavily-undercapitalized banks that were closely monitored by regulator in the aftermath of the 1998 crisis. Whether, in normal circumstances, banks in developing countries like Indonesia comply with capital requirement, therefore, remains questionable. This implies that, if regulators in developing countries continue relying on capital regulation, they would also need to improve their supervision capacity, increase the transparency of financial reporting, and strengthen market monitoring of banks.
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Bibliographic InfoPaper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0712.
Length: 32 pages
Date of creation: 04 Sep 2007
Date of revision:
banking crisis; capital requirement; bank regulation; dynamic panel data;
Other versions of this item:
- Rasyad Parinduri & Yohanes Riyanto, 2011. "Do banks respond to capital requirements? Evidence from Indonesia," Applied Financial Economics, Taylor and Francis Journals, vol. 21(9), pages 651-663.
- 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.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-24 (All new papers)
- NEP-BAN-2007-09-24 (Banking)
- NEP-EFF-2007-09-24 (Efficiency & Productivity)
- NEP-SEA-2007-09-24 (South East Asia)
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