Interest Rates and Bank Risk Taking Behavior of Indonesian Commercial Banks, 2007-2010

Abstract

This study investigates the impact of interest rates on bank risk-taking behavior of Indonesian commercial banks, which measures by risk-weighted assets. In addition, this study also takes into account the influence of other factors such as regulation, bank-specific and macro-economy variables. Using the generalized least squares (GLS) method, this study reveals that the inter-bank offered rate (JIBOR) is positively and significantly affects bank risk-taking behavior. In addition, BI Rate (base rate) has no significant effect, while lending rate has a negative and significant impact on bank risk taking behavior. However, the most influential interest rate is the yield of the government bonds.

Keywords: lending rates, JIBOR, government bond, risk weighted assets

JEL Classification: : C2, E5, G2