Balancing Financial Stability and Credit Access: The Role of Capital Buffers and Bail-In Instruments in Indonesian Banking

The 2008 financial crisis pushed policymakers around the world to rethink how banks could manage risk, leading to the implementation of stricter regulations, including capital buffers and bail-in mechanisms, aimed at making the financial system more resilient. This study examines how three key regulations under Basel III, namely, the Countercyclical Capital Buffer (CCyB), the Capital Conservation Buffer (CCB), and the Capital Surcharge (CS), shape lending patterns in Indonesian banks. The effectiveness of the bail-in policy in helping banks strengthen their capital base is also examined. This study uses difference-in-differences analysis on panel data from 97 banks between 2010 and 2024 to examine the impact of stricter capital regulations on banks’ ability to channel credit to the public and business sectors. Basel III aims to strengthen the resilience of banks; however, this policy could impact credit access and banking stability in Indonesia. This study found a positive impact on LDR of large banks after the treatment, which indicates the banks’ efforts to use the funds collected through credit distribution. This study empirically examines the impact of capital buffer regulation and the bail-in instrument in Indonesia as an emerging-market country with a segmented banking sector and banks’ classification by ownership and core capital value.