The Impact Of An Increase In Capital Adequacy Regulation On The Interest Rate Spread Of Banks Using Accounting-Based Analysis

Ndari Suryaningsih (), Tevy Chawwa and Reni Indriani
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Ndari Suryaningsih: Bank Indonesia

No WP/5/2015, Working Papers from Bank Indonesia

Abstract: This research aims to conduct an early estimate on the impact of capital adequacy policy change on bank’s interest rate spread using accounting relationship-based simulation approach to the balance sheet and income statement of a representative bank. Research result shows that 1 percent of capital adequacy ratio (CAR) increase can be covered by increasing interest rate spread of 6 basis point (bps). The calculation result is obtained from the assumption that return on equity (ROE) and bank borrowing cost do not change as well as there are no changes in the bank’s total assets and non-operational cost. If ROE and borrowing cost are assumed to be changing, the impact on interest rate spread will be smaller. Using the same method for representative bank based on BUKU, it shows that BUKU 1 needs the smallest lending spread increase (1 bps), while BUKU 4 needs the largest lending spread increase (32 bps). The factor affecting differences in the impact of an increase in capital adequacy regulation is the current bank’s ROE. The higher an ROE, the higher interest rate spread increase which is needed

Keywords: banks; regulation; Basel III; capital; liquidity; lending spreads (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015-06
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http://publication-bi.org/repec/idn/wpaper/WP052015.pdf First version, 2015 (application/pdf)

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