A Balance Sheet Approach on Determinants of the Funding Volatility of Banks in Indonesia

A sound banking liquidity management is vital for both banking practices as well as the banking authority because the presence of liquidity mismatch of banks has resulted in weakening depositors’ confidence towards the financial condition of banks, leading to a banking panic. A sound liquidity management is essential for an effective monetary policy since it provides a basis for the stability of the banking and financial system. For this reason, this study aims at investigating the determinants affecting the change in the funding volatility of Indonesian banks. Incorporating monetary and banking variables, the dynamic error correction model (ECM) of this study concludes that the change in the real interest rate, the Jakarta stock price index, capital-to-asset ratio and the number of banks significantly contribute to the change in the funding volatility of banks during the period under review. The policy implication of lowering the risks of funding volatility of Indonesian banks is to sustain the low level of interest rate and increasing bank capital. Policy efforts of encouraging unsound banks to merge is the best option since liquidating banks cause the funding volatility of banks to rise.