BANK REGULATORY CAPITAL, RISK, RETURN, AND ACTIVITY DURING COVID-19 PANDEMIC: EVIDENCE FROM INDONESIA (CASE STUDY: BUKU III AND BUKU IV)

• Main Author: Jan Eric Saragih, Basado
• Format: Theses
• Language: Indonesia
• Subjects: Manajemen umum
• Online Access: https://digilib.itb.ac.id/gdl/view/70563
• Institution: Institut Teknologi Bandung

The conventional business model of a bank that channels credits to businesses involves three essence forms that can decide its ability to continue regular operational business: Risk, the likelihood of potential default that arises from the failure of the bank’s borrower to pay off their contractual obligation; Return, the profits bank generates from its earning assets; and Activity, the business transactions bank conduct such as providing loans and accepting deposits where the lending activity exceeds the amount of the deposits accumulated which will expose the bank to liquidity risk. BUKU III and BUKU IV banks in Indonesia are the group of the largest banks in terms of the amount of capital they own. These groups of banks are labeled to be much more sensitive to systemic risk if they are overcapitalized due to their significant share of credit supply in the market, which small banks are incapable of replacing. Overcapitalization occurs when a bank attempts to capture opportunities from a rising economic trend in the form of excessive loan disbursement. As the COVID-19 pandemic hit, it acutely undermined the economy and incurred a significant decline in real sector activities, causing the commercial and industrial to experience challenges during this period. These conditions resulted in decreased bank profits due to businesses being reluctant to demand loans and tending to create losses amid the persistence of an uncertain environment, along with more borrowers defaulting on their loans because of an unsuccessful plan of their businesses. All of the above-mentioned situations are depictions that emphasize how critical capital is to the functioning of a bank’s activities as it acts as an absorbent to losses and protection to sustain against risk. Poor management control of asset quality and too many loans lent out compared to the number of customer deposits must be addressed and evaluated quickly to intervene them from becoming widely contagious. The objective of this research is to investigate the impact of the Non-Performing Loan ratio, Loan to Deposit ratio, and Return on Asset ratio on the Capital Adequacy Ratio of commercial banks in Indonesia in time of the COVID-19 pandemic. This research involves 16 BUKU III and BUKU IV banks’ financial panel datasets collected from the Indonesian Financial Service Authority. The historical data is retrieved as quarter data in the period of 2018Q3 until 2021Q3. Bank’s capital adequacy ratio (CAR) is treated as the dependent variable measured by capital to risk-weighted assets. Meanwhile, profitability that proxied by Return on Assets for the independent variables, bank risk is represented by NonPerforming Loans and calculated as the Total value of loan loss to total loans, and liquidity that reflected in Loan to Deposit ratio measured by Total loans to total deposits are bank-specific considered as the independent variables as well as the macroeconomic factors such as interest rate and GDP growth as the control variable. This research is analyzed by employing Random-effect panel data regression and the two-step system Generalized Method of Moment (GMM) estimator to take care of the endogeneity subject and omitted variable bias. The empirical outcomes found that all of the independent variables show a significant impact on CAR, with ROA having the biggest impact, followed by a negative association with Non-Performing Loan (NPL) ratio and Loan to Deposit (LDR) ratio, while Return on Asset (ROA) ratio shows positive relationship impact. As to the macroeconomic indicator, it is discovered that both GDP growth and interest rate (IR) are found to have negative affection toward CAR, while only IR has proven to be statistically significant.