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Macroprudential Policy and Financing Behaviour in Dual Banking System: Bank-Level Evidence from Indonesia

Muhamed Zulkhibri () and Muhammad Rizky Prima Sakti ()
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Muhammad Rizky Prima Sakti: Islamic Economic Forum for Indonesian Development (ISEFID), Indonesia.

No 2017-5, Working Papers from The Islamic Research and Teaching Institute (IRTI)

Abstract: The loan-to-funding ratio based reserve-requirement (called as RR-LFR) is a macroprudential instrument used by Bank Indonesia to maintain the stability of Indonesian financial system by considering the bank liquidity condition. This paper examines the impact of RR-LFR on financing behaviour in Indonesian dual banking system. The paper uses generalized method of moment estimation (GMM) technique to address the endogeneity of explanatory variables and reduce the possible biases from residual correlation. Using a bank-level data for both Islamic and conventional banks covering the period 2001-2015, we analyze the reaction of bank financing behavior toward RR-LFR policy. The findings indicate that RRLFR is observed to be effective in curtailing financing behaviour of banking institutions. Further, we show that RR-LFR exerts more impacts in managing credit expansion of conventional banks as compared to Islamic banks.

Keywords: Macroprudential; Dual Banking System; Financing Behaviour; Indonesia; GMM (search for similar items in EconPapers)
JEL-codes: E59 E69 G29 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-sea
Date: 2017-03-01
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