The Determinants of Capital Buffer in Indonesian Banking
Financial Stability Review, Forthcoming
17 Pages Posted: 18 May 2010 Last revised: 24 May 2010
Date Written: May 18, 2010
Abstract
Using monthly data of 99 commercial banks during the period 2004-2007, we investigate whether capital buffer can be explained by bank-specific, business cycle, regulatory and institutional variables. In regards to the business cycle, we find evidence that bank capital buffer is procyclical. These finding becomes different, if we divide banks into two sub-groups according to bank size and market involvement. More importantly, larger banks and listed banks more involved in market activities, tend to increase their capital buffer during economic booms, but reduce it during economic downturns. These findings have regulatory implications for the Basel II implementation in Indonesia, notably in solving its procyclicality. For instance, small banks consolidations and supporting banks to more involve in market activities, as well as market discipline enforcement, become necessary. This paper also reveals that higher non-interest income enhances capital buffer.
Keywords: bank, capital buffer, Basel II, procyclical effect, Indonesia
JEL Classification: G21, G28
Suggested Citation: Suggested Citation
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