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Does the Core Capital Requirement Affect Bank Performance?

Author

Listed:
  • Julianto

    (Department of Management, University of Sam Ratulangi, Indonesia)

  • Fitty Valdi ARIE

    (Institute of Applied Economics, University of Debrecen)

Abstract

In 2020, the Financial Services Authority of Indonesia (OJK) introduced Regulation No. 12/POJK.03/2020, mandating that all commercial banks maintain a minimum core capital of three trillion rupiah by the end of 2022. This regulatory change aimed to strengthen the financial resilience and stability of the banking sector. However, the potential impact of this requirement on bank performance remains a critical area of investigation. This study seeks to provide empirical evidence on the relationship between core capital requirements and the financial performance of commercial banks in Indonesia. Using banking statistical data from 2013 to 2022, we examine the extent to which core capital influences bank profitability. The study employs Common Equity Tier 1 (CET1) and Capital Adequacy Ratio (CAR) as proxies for core capital, while Return on Assets (ROA) and Return on Equity (ROE) serve as indicators of bank performance. A descriptive-explanatory research design was adopted, and a simple regression analysis was conducted to assess the relationship between these variables. The findings reveal that the core capital requirement has a statistically significant negative effect on bank profitability, suggesting that higher capital requirements may impose constraints on the financial performance of commercial banks. Based on these results, we recommend that banking regulators in Indonesia strengthen their oversight mechanisms and explore strategies to mitigate potential adverse effects, ensuring that capital requirements contribute positively to the stability and long-term performance of the banking sector.

Suggested Citation

  • Julianto & Fitty Valdi ARIE, 2025. "Does the Core Capital Requirement Affect Bank Performance?," SEA - Practical Application of Science, Romanian Foundation for Business Intelligence, Editorial Department, vol. 0(37), pages 15-24, May.
  • Handle: RePEc:cmj:seapas:y:2025:i:37:p:15-24
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    More about this item

    Keywords

    Bank Core Capital; Bank Profitability; Commercial Banks; Indonesia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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