MACROECONOMIC CONDITION AND BANKING INDUSTRY PERFORMANCE IN INDONESIA

Mahjus Ekananda ()
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Mahjus Ekananda: University of Indonesia

Bulletin of Monetary Economics and Banking, 2017, vol. 20, issue 1, 71-98

Abstract: The ratio of non-performing loan (NPL) and capital adequacy ratio (CAR) is still a measure of bank soundness in various countries including Indonesia. Interdependence acros bank’s condition, diversity of the size, market structure within banking industry, and macroeconomic variables, may be very complex and dynamic. This paper utilizes the advantage of PVAR model on capturing this complexity to analyze the dynamic relationship between the macroeconomic variables and the soundness of the banks. The result shows NPL of banks with small asset will increases rapidly when interest rate fluctuates. For banks with large asset, the increase in interest rates leads to larger reduction on their CAR. On the other hand, the result shows banks with smaller capital are less able to adapt quickly to an increase in NPL due to exchangerate depreciation, therefore banks with smaller capital should be cautious about the exchange rate risk.

Keywords: Credit; PVAR; Banking; Interest Rate; Exchange Rate (search for similar items in EconPapers)
JEL-codes: C33 C42 E42 E43 E51 F32 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:20:y:2017:i:1c:p:71-98

DOI: 10.21098/bemp.v20i1.725

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