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The Influence of Banking Regulation and Board Remuneration on Cost Efficiency of Indonesian Banks

In: Proceedings of the 5th International Conference on Global Innovation and Trends in Economy 2024 (INCOGITE 2024)

Author

Listed:
  • Daffaa Dewa Al-Ghiffari

    (Universitas Indonesia)

  • V. Viverita

    (Universitas Indonesia)

Abstract

This study examines the relationship between bank capital regulation, income diversification, market discipline, and board remuneration on cost efficiency of Indonesia banks during the 2013–2022 period. The sample consists of 77 Indonesian banks registered in Indonesian Financial Service Authority (OJK) as of February 2023. The Stochastic Frontier Analysis (SFA) was employed to estimate bank cost efficiency scores, and panel data regression was used to analyze the effects of independent variables on banks cost efficiency. The results showed that bank capital regulation, as measured by Capital Adequacy Ratio (CAR), lowered cost efficiency. Bank income diversification and market discipline, as measured by the use of a Big 4 auditor, have a negative but insignificant impact on bank efficiency. Finally, the Board's remuneration mechanism was proven to increase cost efficiency. The findings implies that Indonesia's banking industry should improve their policy regarding management’s risk-taking behavior related to the use of bank capital for their interest. Additionally, this study suggests the Indonesian banking sector should reconsider income diversification strategy and, instead, start to focus on funding diversification to boost performance. Lastly, the Indonesian banking industry does not need to use a Big 4 auditor for assessing their information quality since they just give a lower bank cost efficiency compared to non-Big 4.

Suggested Citation

  • Daffaa Dewa Al-Ghiffari & V. Viverita, 2024. "The Influence of Banking Regulation and Board Remuneration on Cost Efficiency of Indonesian Banks," Advances in Economics, Business and Management Research, in: Soebowo Musa & Eric J. Nasution & Derek Ong Lai Teik & Hanny N. Nasution & Gilbert M. Tumibay & Amiz (ed.), Proceedings of the 5th International Conference on Global Innovation and Trends in Economy 2024 (INCOGITE 2024), pages 109-131, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-585-0_9
    DOI: 10.2991/978-94-6463-585-0_9
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