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Macro-Financial Determinants Of Default Probability Using Copula: A Case Study Of Indonesian Banks

Author

Listed:
  • Maulana Harris Muhajir

    (NEOMA Business School)

  • Pierre SIX

    (NEOMA Business School)

  • Jung-Hyun Ahn

    (NEOMA Business School)

Abstract

We investigate the default probability of Indonesian banks using the copula approach and analyze the macro-financial factors that drive them. We use quarterly data comprised of 80 banks from 2005 to 2019. We find empirical evidence that Common Equity Tier 1 (CET 1) ratio, inefficiency ratio, and deposit ratio have negatively impacted the bank’s default probability. We also find that macroeconomic variables such as policy rate, real exchange, economic growth, and unemployment reduce the default probability. Our study suggests that regulators should focus on capital and deposit management policies to reduce bank risk-taking behaviour. Additionally, the policy rate effectively anticipated the banks’ default risk.

Suggested Citation

  • Maulana Harris Muhajir & Pierre SIX & Jung-Hyun Ahn, 2022. "Macro-Financial Determinants Of Default Probability Using Copula: A Case Study Of Indonesian Banks," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(4), pages 597-622, January.
  • Handle: RePEc:idn:journl:v:25:y:2022:i:4d:p:597-622
    DOI: https://doi.org/10.21098/bemp.v25i4.1748
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    More about this item

    Keywords

    Macroeconomic variables; Default probability; Panel-data; Copula;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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