Determinites of the funding volatility of Indonesian banks: a dynamic model

James Obben and Agus Eko. Nugroho
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Agus Eko. Nugroho: Massey University, New Zealand

Journal of Developing Areas, 2006, vol. 39, issue 2, 41-61

Abstract: Illiquidity is at the core of the various currency and banking/financial crises of the 1990s. In the wake of the Asian crisis of 1997/98 the term ìsystemic liquidityî has been coined to refer to adequate arrangements and practices which permit efficient liquidity management and which provide a buffer during financial distress. A constructed balance-sheet-based variable that captures the essence of the risk from systemic liquidity is funding volatility ratio, FVR. Using data covering January 1990 to October 2003 and employing cointegration techniques, this study attempts to quantify the purported link between FVR and the measurable determinants of a balanced liquidity infrastructure for Indonesia, the country that suffered the most from the Asian crisis. A good fit is obtained for the dynamic regression model and estimates of short-run and long-run impacts and elasticities are computed. FVR has trended upwards and also is shown to be increasing in the interest rate, foreign liabilities: total asset ratio and the Jakarta stock market index, and decreasing in capital:asset ratio, the rupiah-US dollar exchange rate and the number of banks. The foremost requirement for lowering the FVR is a steady exchange rate followed by increases in bank capital.

Keywords: Autoregressive Distributed Lag Model; Cointegration; Funding Volatility Ratio; Systemic Liquidity (search for similar items in EconPapers)
JEL-codes: C22 G21 N25 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.39:year:2006:issue2:pp:41-61

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