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Risk and capital in Indonesian large banks

Author

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  • Arisyi Fariza Raz

Abstract

Purpose - The purpose of this paper is to examine the behavior of banking risk in the emerging economies, particularly Indonesia and contribute to the discussion on the existing policy debate regarding the impact of capital on bank risk. Design/methodology/approach - This study investigates the relationship between bank risk and capital using data on 15 Indonesian large banks between 2008 and 2015, using z-score and Delta-CoVaR to measure both idiosyncratic and systemic risks. Findings - The empirical investigation suggests that capital has a negative and significant relationship with these risk measures. The authors also find that higher systemic risk encourages banks to increase their capital. However, similar evidence is not found in the idiosyncratic risk models. Finally, the role of capital in reducing risk is considered robust only during the normal periods, as banks may increase their assets risk during times of financial distress. Originality/value - Systemic risk (CoVaR) is used to represent bank risk. This study focuses on the Indonesian banking sector (capture institutional arrangements and regulatory environment). It covers the period of 2008 GFC and post-crisis period.

Suggested Citation

  • Arisyi Fariza Raz, 2018. "Risk and capital in Indonesian large banks," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(1), pages 165-184, April.
    • Handle: RePEc:eme:jfeppp:jfep-06-2017-0055
    DOI: 10.1108/JFEP-06-2017-0055
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    Citations

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    Cited by:

    1. Anggraeni, Anggraeni & Mongid, Abdul & Suhartono,, 2020. "Prediction Models for Bank Failure: ASEAN Countries," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 54(2), pages 41-51.
    2. Xiaoming Zhang & Chunyan Wei & Stefano Zedda, 2019. "Analysis of China Commercial Banks’ Systemic Risk Sustainability through the Leave-One-Out Approach," Sustainability, MDPI, vol. 12(1), pages 1-15, December.

    More about this item

    Keywords

    Bank; Systemic risk; Financial markets and institutions; Capital; Financial Risk and risk management; Insolvency; C36; G21; G32;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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