Tri-Cycles Analysis on Bank Performance: Panel VAR Approach

Denny Irawan and Febrio Kacaribu

No 201707, LPEM FEBUI Working Papers from LPEM, Faculty of Economics and Business, University of Indonesia

Abstract: The financial crisis of 2007/8 has revealed the importance of risk, besides credit, in the dynamics of financial cycle and business cycle in the economy. This study examines relationship among those three cycles in the economy (Tri-Cycles), namely (i) business cycle risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance. We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle risk and its consequence to the bank performance. We use Indonesian data for period of 2002q1 to 2014q4. We use unbalanced panel data of individual banks’ balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by implementing PVAR package developed by [1]. The result shows dynamic relationship between business cycle risk and financial risk cycles. The study also observes prominent role of risk cycles in driving bank performance. We also show the existence of financial accelerator phenomenon in Indonesian banking system, in which financial cycles precede the business cycle risk.

Keywords: Business; Cycle; Risk; —; Credit; Cycle; —; Bank; Lending; —; Financial; Risk (search for similar items in EconPapers)
JEL-codes: E32 G21 G31 (search for similar items in EconPapers)
Date: 2017-07, Revised 2017-07
New Economics Papers: this item is included in nep-ban, nep-mac and nep-sea
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:lpe:wpaper:201707

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