MACRO-FINANCIAL DETERMINANTS OF DEFAULT PROBABILITY USING COPULA: A CASE STUDY OF INDONESIAN BANKS

Maulana Harris Muhajir (), Pierre Six () and Jung-Hyun Ahn
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Maulana Harris Muhajir: NEOMA Business School
Pierre Six: NEOMA Business School

Bulletin of Monetary Economics and Banking, 2022, vol. 25, issue 4, 597-622

Abstract: We investigate the default probability of Indonesian banks using the copula approach and analyze the macro-financial factors that drive them. We use quarterly data comprised of 80 banks from 2005 to 2019. We find empirical evidence that Common Equity Tier 1 (CET 1) ratio, inefficiency ratio, and deposit ratio have negatively impacted the bank’s default probability. We also find that macroeconomic variables such as policy rate, real exchange, economic growth, and unemployment reduce the default probability. Our study suggests that regulators should focus on capital and deposit management policies to reduce bank risk-taking behaviour. Additionally, the policy rate effectively anticipated the banks’ default risk.

Keywords: Macroeconomic variables; Default probability; Panel-data; Copula (search for similar items in EconPapers)
JEL-codes: C2 C3 E5 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:idn:journl:v:25:y:2022:i:4d:p:597-622

DOI: 10.21098/bemp.v25i4.1748

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