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Optimisation of Bank Portfolio Composition in Indonesia

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  • Iman Gunadi
  • Advis Budiman

Abstract

The research and bank model developed in this paper for the case of Indonesia is motivated by the following: 1. A recent change in banking regulations in Indonesia, like the statutory reserve requirement and full implementation of Basel II in 2011, coupled with a lack of literature to document these changes; 2. A lack of reliable bank models to observe bank behaviour in Indonesia; 3. A lack of policy simulation tools that can help with the analysis of banking policy in Indonesia. The bank model developed in this paper is tailored to several of the latest banking policies utilising a modified version of the banking industry organisation approach used by Monti (1972) and Klein (1971). This research is the development and recalibration of previous models from several research papers used to simulate policy, in particular in the banking system of Indonesia. Differing from past research, this paper uses the respective ratios of bank balance sheet items against the total assets of the corresponding bank. A number of issues that developed were accommodated under a framework of reducing liquidity risk and credit risk, thereby bolstering financial system stability. Several simulations were conducted covering a variety of scenarios in order to observe the impact of a policy on the optimal composition of a bank. Furthermore, the model also tried to project the bank’s portfolio composition taking into consideration macroeconomic projections and banking indicators. The dynamic model was developed using different scenarios, which is expected to provide policymakers with a clearer picture of the conditions of a particular bank over time.

Suggested Citation

  • Iman Gunadi & Advis Budiman, 2012. "Optimisation of Bank Portfolio Composition in Indonesia," EcoMod2012 4166, EcoMod.
    • Handle: RePEc:ekd:002672:4166
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    References listed on IDEAS

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    5. Thilo Pausch & Peter Welzel, 2002. "Credit Risk and the Role of Capital Adequacy Regulation," Discussion Paper Series 224, Universitaet Augsburg, Institute for Economics.
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    7. Donsyah Yudistira, 2002. "The Impact of Bank Capital Requirements in Indonesia," Finance 0212002, University Library of Munich, Germany, revised 18 May 2003.
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