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The Impact of Interconnectedness in Interbank Call Money Market to Indonesian Banking Efficiency

Justina Adamanti, Ndari Surjaningsih, Januar Hafidz, Justina Adamanti, M. Harris Muhajir and M. Sahirul Alim

No 10547, EcoMod2017 from EcoMod

Abstract: Interbank call money market is an essential element for banking system, because bank with excess liquidity could lend its idle fund to bank suffering with liquidity shortage. How bank's interconnectedness in the interbank call money market provides benefit to banks will depend on the market structure. Bank's decision in this market will also impact on their efficiency. Therefore, the aims of this research are to study the structure of interbank call money market in Indonesia using network statistics, and to understand how the interconnectedness effects to bank efficiency in cost and profit. This research follows the methodology in Guerra et.al. (2014) which assess the impact of interconnectedness to efficiency in Brazil banking. It uses network analysis to assess the market structure of the interbank call money market, such as degree, in-degree, out-degree, betweenness, closeness, and clustering. The network variables from network analysis will be used in Stochastic Frontier Analysis (SFA) model to explain the impact of interconnectedness to bank efficiency in cost and profit. The SFA model used in this research is based on Battese and Coelli (1995). This research uses detail banking transaction data of 93 Indonesian banks in interbank call money market. 1)Based on network analysis, there is a tendency of concentration and segmentation in the interbank call money market. Low value of clustering and low degree dominance in the scale-free distribution confirm the hypothesis. 2)When acts as borrower, bank tends to be cost efficient but inefficient in profit. This is because bank transactions in the interbank call money market are more intended for short-term liquidity management, not for profit maximization. 3)The existence of banks that act as intermediary in the interbank call money market could lead banks to become less efficient. 4)Meanwhile, banks tend to be cost efficient when they are close to each other. An explanation for this conclusion is the existence of market segmentation in the interbank market which leads the interbank interest rate is set based on the bank size. On the contrary, banks tend to be inefficient in profit when they are close to each other. One possible reason is bank can earn more profit from the idle funds in the interbank call money market.

Keywords: Indonesia; Finance; Impact and scenario analysis (search for similar items in EconPapers)
Date: 2017-07-04
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