Banking Crises and Market Discipline in Indonesian Banking Industry

Abstract

This study analyzes the effect of banking crises towards market discipline in Indonesia. This study uses two periods of crisis in Indonesia, which are banking crisis in 1997/1998 and banking crisis in 2008. The dependent variable is market discipline; while bank risks are the independet variables (insolvency, liquidity, and credit risks). The control variables are banking level (the percentage savings of the customer, bank's size, bank's overhead costs, and Lerner index); industrial level (banking concentration level, the bank development); and macroeconomic variables (the growth of the real gross domestic product and inflation rate). The variables examined by the Generalized Method of Moments (GMM). This study finds a fact that on average market discipline weakens after Indonesia's banking crisis in 1997/1998. On the contrary, this study found a fact that market discipline strengthens after Indonesia's banking crisis in 2008. Eventually, this study finds a fact that there is no difference in market discipline between the domestic bank and foreign bank after Indonesia's banking crisis in 2008.Keywords: Banking crises; market discipline; bank risk taking; Indonesia. ABSTRAK Penelitian ini menguji dampak krisis perbankan terhadap market discipline di Indonesia, Penelitian ini menggunakan dua periode krisis perbankan di Indonesia yaitu tahun 1997/1998 dan tahun 2008. Variabel dependen adalah market discipline, sedangkan risiko perbankan merupakan variabel independen yang meliputi insolvency, likuiditas dan risiko kredit. Variabel kontrol terdiri dari level perbankan (tingkat tabungan pelanggan, ukuran bank dan beban overhead bank, Lerner index), level industry (level konsentrasi bank dan bank development), dan variabel-variabel ekonomi makro yang terdiri dari tingkat pertumbuhan produk domestic bruto riil dan tingkat inflasi. Variabel penelitian diuji menggunakan Generalized Method of Moments (GMM