Capital adequacy assessment in Indonesia: an empirical study

Many Indonesian banks suffered problems and some even failed in the early 1990s. This provided evidence that risk-based capital adequacy regulation in Indonesia had failed to prevent banks from taking excessive risks. Such observations provide the motivation for this thesis which seeks to identify t...

Full description

Saved in:
Bibliographic Details
Main Author: Wimboh Santoso
Format: Default Thesis
Published: 1999
Subjects:
Online Access:https://hdl.handle.net/2134/7096
Tags: Add Tag
No Tags, Be the first to tag this record!
id rr-article-9496118
record_format Figshare
spelling rr-article-94961181999-01-01T00:00:00Z Capital adequacy assessment in Indonesia: an empirical study Wimboh Santoso (7195595) Other commerce, management, tourism and services not elsewhere classified Banking Capital Indonesia Business and Management not elsewhere classified Many Indonesian banks suffered problems and some even failed in the early 1990s. This provided evidence that risk-based capital adequacy regulation in Indonesia had failed to prevent banks from taking excessive risks. Such observations provide the motivation for this thesis which seeks to identify the nature of bank risks in Indonesia and also analyses the operation of risk-based capital adequacy regulation in Indonesia. To obtain a general view of risk in Indonesian banks, this thesis includes an empirical study to identify the determinants of problem banks in Indonesia using a logit fixedeffect model. The model also can be used as an "early warning" device in banking supervision. This study finds that credit risk and operational risk contributed significantly to banking problems. State banks, non-foreign exchange banks and regional development banks are shown to be also sensitive to interest rate risk. Foreign exchange rate risk is less significant for banks (by group) in Indonesia. If we examine cases individually, however, there were some bank failures which were due to excessive foreign exchange rate risk. This thesis also finds that the adoption of risk-based capital adequacy regulation in Indonesia contains some deficiencies, such as focusing only on credit risk (ignoring market risk). This study suggests that market risk should be included in capital adequacy assessment and a number of alternative models of risk assessment [exponential weighted moving average (EWMA) and generalised autoregressive heteroscedasticity (GARCH)] are analysed. The results of the empirical study show that the inclusion of foreign exchange rate risk in capital adequacy assessment results in a higher capital requirement than that resulting from the application of the BIS's standardised methodology. This study also finds that the decay factor of 0.94 suggested by J. P. Morgan (J. P. Morgan, 1995, 1996) is irrelevant for [DR (Indonesian Rupiah) exchange rate returns. Additionally, assessment of foreign exchange rate risk using GARCH suggests a lower capital charge than that applicable under the BIS's standardised methodology and EWMA. The policy implications of these findings are also considered. 1999-01-01T00:00:00Z Text Thesis 2134/7096 https://figshare.com/articles/thesis/Capital_adequacy_assessment_in_Indonesia_an_empirical_study/9496118 CC BY-NC-ND 4.0
institution Loughborough University
collection Figshare
topic Other commerce, management, tourism and services not elsewhere classified
Banking
Capital
Indonesia
Business and Management not elsewhere classified
spellingShingle Other commerce, management, tourism and services not elsewhere classified
Banking
Capital
Indonesia
Business and Management not elsewhere classified
Wimboh Santoso
Capital adequacy assessment in Indonesia: an empirical study
description Many Indonesian banks suffered problems and some even failed in the early 1990s. This provided evidence that risk-based capital adequacy regulation in Indonesia had failed to prevent banks from taking excessive risks. Such observations provide the motivation for this thesis which seeks to identify the nature of bank risks in Indonesia and also analyses the operation of risk-based capital adequacy regulation in Indonesia. To obtain a general view of risk in Indonesian banks, this thesis includes an empirical study to identify the determinants of problem banks in Indonesia using a logit fixedeffect model. The model also can be used as an "early warning" device in banking supervision. This study finds that credit risk and operational risk contributed significantly to banking problems. State banks, non-foreign exchange banks and regional development banks are shown to be also sensitive to interest rate risk. Foreign exchange rate risk is less significant for banks (by group) in Indonesia. If we examine cases individually, however, there were some bank failures which were due to excessive foreign exchange rate risk. This thesis also finds that the adoption of risk-based capital adequacy regulation in Indonesia contains some deficiencies, such as focusing only on credit risk (ignoring market risk). This study suggests that market risk should be included in capital adequacy assessment and a number of alternative models of risk assessment [exponential weighted moving average (EWMA) and generalised autoregressive heteroscedasticity (GARCH)] are analysed. The results of the empirical study show that the inclusion of foreign exchange rate risk in capital adequacy assessment results in a higher capital requirement than that resulting from the application of the BIS's standardised methodology. This study also finds that the decay factor of 0.94 suggested by J. P. Morgan (J. P. Morgan, 1995, 1996) is irrelevant for [DR (Indonesian Rupiah) exchange rate returns. Additionally, assessment of foreign exchange rate risk using GARCH suggests a lower capital charge than that applicable under the BIS's standardised methodology and EWMA. The policy implications of these findings are also considered.
format Default
Thesis
author Wimboh Santoso
author_facet Wimboh Santoso
author_sort Wimboh Santoso (7195595)
title Capital adequacy assessment in Indonesia: an empirical study
title_short Capital adequacy assessment in Indonesia: an empirical study
title_full Capital adequacy assessment in Indonesia: an empirical study
title_fullStr Capital adequacy assessment in Indonesia: an empirical study
title_full_unstemmed Capital adequacy assessment in Indonesia: an empirical study
title_sort capital adequacy assessment in indonesia: an empirical study
publishDate 1999
url https://hdl.handle.net/2134/7096
_version_ 1794754741834612736