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Bank fundamental dynamics: the role of optimal bank management

Author

Listed:
  • Moch. Doddy Ariefianto
  • Tasha Sutanto
  • Cecilia Jesslyn

Abstract

Purpose - This study aims to investigate the dynamic relationships between profitability, credit risk, liquidity risk and capital in Indonesian banking industry. Design/methodology/approach - The authors use a panel vector autoregression model that incorporates macroeconomic variables: growth, interest rate, foreign exchange. The analysis is based on a monthly panel data set of 88 banks spanning from January 2012 to September 2021, which comprises 10,296 bank-month observations. Findings - Our key findings highlight (i) permanent credit cost and liquidity cost pass through practices, (ii) complementary function of liquidity and capital, (iii) earning management motivated asset write off and (iv) credit risk-liquidity risk neutrality. In addition, the authors observe that the banks demonstrated resilience to macroeconomic shocks. Research limitations/implications - Our study have shown some interesting dynamic patterns of fundamentals; nevertheless, unified theoretical underpinning of the process is still unavailable. This should be an important future reasearch avenue. Practical implications - The study brings significant implications for regulatory and supervisory practices aimed at enhancing the financial stability of banks. Originality/value - We conduct estimation of Indonesian banks system in dynamic perspective and perform impulses responses.

Suggested Citation

  • Moch. Doddy Ariefianto & Tasha Sutanto & Cecilia Jesslyn, 2024. "Bank fundamental dynamics: the role of optimal bank management," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 16(6), pages 825-855, June.
    • Handle: RePEc:eme:jfeppp:jfep-04-2023-0094
    DOI: 10.1108/JFEP-04-2023-0094
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    More about this item

    Keywords

    Bank; Panel data; Vector autoregression; Fundamental dynamics; C33; C54; G21; G32;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • 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

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