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An Empirical Study of Optimal Bank Corrective Action for Indonesia Employing the Dynamic Contingent Claims Model

Author

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  • Maximilian J. B. Hall

    (Department of Economics, Loughborough University, Leicestershire, LE 11 3TU, UK)

  • Ganjar Mustika

    (Financial Stability Bureau, Directorate of Banking Research and Development, Bank Indonesia, JL. M.H. Thamrin No. 2, Jakarta 10110, Indonesia)

Abstract

This study highlights how banking regulation in Indonesia can be improved with a view to enhancing the cost-effectiveness of banking regulation and social welfare, and preventing future financial instability. We employ the Fries, Mella-Barral, and Perraudin (FMP) model (1997) and analyze the model under a robust regulatory regime concept to provide a new framework for banking regulation. Maximum likelihood estimates in VAR and GARCH are applied to monthly data on the market returns and deposit values for relatively-large banks. The results show how the authorities in Indonesia can establish optimal closure rules for each bank, levy "fair" deposit insurance premiums, estimate optimal subsidies (for different deposit insurance premiums) and identify the banks' "imminence to bankruptcy".

Suggested Citation

  • Maximilian J. B. Hall & Ganjar Mustika, 2005. "An Empirical Study of Optimal Bank Corrective Action for Indonesia Employing the Dynamic Contingent Claims Model," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 339-376.
    • Handle: RePEc:wsi:rpbfmp:v:08:y:2005:i:03:n:s0219091505000452
    DOI: 10.1142/S0219091505000452
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    3. Kevin Dowd, 1996. "Competition and Finance," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-24856-8, September.
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    Citations

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    Cited by:

    1. Muliaman Hadad & Maximilian Hall & Karligash Kenjegalieva & Wimboh Santoso & Richard Simper, 2011. "Banking efficiency and stock market performance: an analysis of listed Indonesian banks," Review of Quantitative Finance and Accounting, Springer, vol. 37(1), pages 1-20, July.
    2. Gandjar Mustika & Enny Suryatinc & Maximilian Hall & Richard Simper, 2015. "Did Bank Indonesia cause the credit crunch of 2006–2008?," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 269-298, February.

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    More about this item

    Keywords

    Bank closure policies; deposit insurance; JEL Classification: G21; JEL Classification: G28; JEL Classification: G32; JEL Classification: G38;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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