Risk and capital in Indonesian large banks

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Purpose: The purpose of this paper is to examine the behavior of banking risk in the emerging economies, particularly Indonesia and contribute to the discussion on the existing policy debate regarding the impact of capital on bank risk. Design/methodology/approach: This study investigates the relationship between bank risk and capital using data on 15 Indonesian large banks between 2008 and 2015, using z-score and Delta-CoVaR to measure both idiosyncratic and systemic risks. Findings: The empirical investigation suggests that capital has a negative and significant relationship with these risk measures. The authors also find that higher systemic risk encourages banks to increase their capital. However, similar evidence is not found in the idiosyncratic risk models. Finally, the role of capital in reducing risk is considered robust only during the normal periods, as banks may increase their assets risk during times of financial distress. Originality/value: Systemic risk (CoVaR) is used to represent bank risk. This study focuses on the Indonesian banking sector (capture institutional arrangements and regulatory environment). It covers the period of 2008 GFC and post-crisis period.
    Original languageEnglish
    Pages (from-to)165-184
    Number of pages20
    JournalJournal of Financial Economic Policy
    Volume10
    Issue number1
    DOIs
    Publication statusPublished - 3 Apr 2018

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