Bank Run Determinants in Indonesia: Bad Luck or Fundamental Factors?

Bank runs and banking crises have become global phenomena occurring repeatedly in both developed and developing countries during the last few decades. Bank runs and banking crises have increased since financial liberalization in the 1980?s and 1990?s (Davis and Karim, 2007). In Indonesia, bank runs have also occurred repeatedly. In 1992, bank runs beset a few national banks triggering the liquidation of one of the country?s national private banks. Subsequently, in 1997/1998, bank runs developed into the worst banking crisis in the history of Indonesian banking. Empirical experience can demonstrate the magnitude of costs incurred due to bank runs and the banking crisis. In Indonesia?s case, the total fiscal cost involved for the recuperation of banks and output loss due to banking crises in Indonesia during the period of 1997-2002 were 55% and 39% of gross domestic product respectively (Hanson, 2005). Considering the extent of losses precipitated by bank runs and the banking crisis, extensive studies on the determinants of bank runs are urgently required to prevent future bank runs and banking crises. This paper aims to comprehensively analyze the determinants of a bank runs, including macroeconomic conditions, bank fundamentals and the self-fulfilling prophecy factor for all banks, both during the sample period of 1990-2005 as well as during the banking crisis in 1997-1998. The study of bank run determinants uses the dynamic panel model of Arrelano-Bond. Based on monthly bank data from 1990-2005, the Arrelano-Bond dynamic panel shows that the self-fulfilling prophecy factor (bad luck), bank fundamentals -including profitability and non-performing loans- as well as macroeconomic conditions such as economic growth, inflation and real interest rates affect bank runs in Indonesia. Bank run determinants during the crisis period in 1997-1998 also display similar results to bank run determinants for the extended sample period of 1990-2005. See above See above