Analysis of Capital Buffer and Revenue Diversification on Banking Stability wIn Indonesia

Hendra Hendra and Yosman Bustaman ()
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Hendra Hendra: Swiss German University
Yosman Bustaman: Swiss German University

A chapter in Proceedings of the 5th International Conference on Global Innovation and Trends in Economy 2024 (INCOGITE 2024), 2024, pp 171-188 from Springer

Abstract: Abstract The research aims to analyze the relationship between Capital Buffer and Revenue Diversification affecting Banking Stability in Indonesia. The focus is on commercial banks from 2015 to 2022, involving 62 listed and non-listed commercial banks, excluding Sharia Banks and Regional Government Banks (BPD), with data collected from the Financial Services Authority’s (OJK) website. In this study, the panel data regression method was used to analyze the influence of capital buffer and revenue diversification on banking stability in Indonesia. Banking stability is measured using Z-Score as the dependent variable, while Capital Buffer and Revenue Diversification are used as independent variables. The study also considers Macroeconomic Conditions and Bank Specifics as Control Variables, and Covid-19 as a dummy variable. Findings indicate that the capital buffer has a significant positive impact on bank stability in Indonesia, particularly for banks diversifying income into non-interest sources due to the volatility of their income. Having a sufficient capital buffer can enhance the confidence of both customers and investors in the bank’s stability, thereby potentially improving its market value and financial performance. Results show that the diversification of non-interest income has the potential to enhance bank stability, especially for small banks, whereas larger banks benefit more from focusing on interest income. Experts are required to manage these trading products because specialized knowledge in specific types of loan products can lead to more specialized bank services. This specialization enables banks to charge higher margins, thereby reducing the risk of bank failure. This study also supports the implementation of strict capital requirements and the consolidation of small and medium-sized banks to improve stability of the banking industry.

Keywords: Capital Buffer; Revenue Diversification; Bank Stability; Indonesian Banking (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-585-0_13

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DOI: 10.2991/978-94-6463-585-0_13

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