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Green regulation, market power, and geopolitical risk: the case of Indonesian banks

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  • Ariefianto, Moch Doddy
  • French, Joseph J.
  • Gurdgiev, Constantin

Abstract

This study examines the profitability effects of Indonesia’s 2017 sustainable-finance regulations. Monthly data for 91 commercial banks (2013–2023) are analyzed with a dynamic common correlated effects estimator. Three results emerge. First, average returns on assets and equity rise after the mandate, pointing to a net gain from compliance. Second, the interaction between the regulation and the geopolitical-risk index is negative, indicating that the new framework reduced that profitability sensitivity to external uncertainty shocks. Third, stronger market power magnifies asset-side gains while compressing equity returns. The widened ROA-ROE gap reflects scale economies that dominant banks extract under the green-lending framework, set against thicker capital buffers that dilute leverage-adjusted profits. Findings remain stable across robustness checks.

Suggested Citation

  • Ariefianto, Moch Doddy & French, Joseph J. & Gurdgiev, Constantin, 2025. "Green regulation, market power, and geopolitical risk: the case of Indonesian banks," Finance Research Letters, Elsevier, vol. 85(PE).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pe:s1544612325014941
    DOI: 10.1016/j.frl.2025.108243
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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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