Macroprudential Policy and Credit Risk in Dual Banking System

Abstract

Issues related to financial stability are a very complex problem, especially the global crisis impact in 2008. Based on these conditions, the Basel Committee on Banking Supervision introduced a macroprudential policy to mitigate financial system risk systemically. The study aims to analyze the impact of macroprudential policy on the banks’ risk exposure by adopting credit risk as a risk proxy. By adopting a panel dynamic approach, credit risk is used to be a dependent variable while independent variables consist of the reserve requirement, capital buffer, and a net open position in either conventional and Islamic banks. The observation period starts from 2014 to 2019 with quarterly data, and it involves 22 banks in Indonesia. The study found that macroprudential policy has a long-run relationship to Islamic banks' credit risk but not to conventional banks. The result from Variance Decompositions (VDs) and Impulse Response Factors (IRFs) also showed that each independent variables have an impact to credit risk value in many different directions. According to that, this study suggests that Indonesian financial authority has to pay attention to the different effectiveness and impact of its macroprudential policy, which has to consider the specific characteristics of either conventional or Islamic banks..

Exploring the nexus among the Macroprudential Policies, Funding Liquidity Risk and bank risk of Commercial Banks in Leading South East Asian Economies

“…However, no attention has been given to capture the LR. C RR and LR remain unaccounted by Mustain and Fakhrunnas (2021).…”

“…The MPP is important as just relying on the microprudential policies will cause the trickle-down effect in whole system, as it is evident from the latest incident of subprime crisis. Recentl y Mustain and Fakhrunnas (2021) found that MPPs are effective in mitigating the BR. However, the effect of these MPPs on BR varies as per bank balance sheet characteristics such as liquidity and CRR.…”

“…In continuing the argument, they also broached that the MPP are proposed to mitigate the BR by enhancing the resilience of financial system during an economic downturn, which in turn helps in the promotion of sustainable growth of financial intermediation, and a central bank can trust on the MPP for the supervision and monitoring of the BR. A part of increasing resilience of the financial system, the MPPs are also aimed to address the cyclical risk arising from any, local, regional or global cycle (Mustain & Fakhrunnas, 2021). The countercyclical capital buffer, dynamic reserve requirements and the loan to value ratio are few of macroprudential tools that aimed to enhance the ability of banks to deal with economic and financial cycles by detecting the BR in advance.…”

“…Following the study of Dang (2020),we are also interested in examining the moderating role of macroprudential index , macroprudential resilience index and macroprudential cyclic index on the relationship between funding LR and BR. Basing on the studies of Khan et al (2017), Basheer et al (2021), Correa et al (2020), Mairafi et al (2018), Liu (2018), Chen et al (2018), Mustain and Fakhrunnas (2021), Umar and Sun (2016) and Smaoui et al (2020), Chen et al (2018), Umar and Sun (2016), Khan et al (2017), Basheer et al (2021), Mairafi et al (2018), Liu (2018), Smaoui et al (2020), and Mustain and Fakhrunnas (2021)…”

Investigating the Impact of Stock Price Index on Credit Risk of Banks Listed in the Stock Exchange Market

“…These crises highlight the importance of explaining the relationship between economic conditions and the health of the banking system. Because during the crises, the level of claims increases sharply, a significant amount of banking resources is depleted [4]. Explaining the above relationship, which is more important during the financial crises, leads to identifying the strength of the banking system, especially from the point of view of default of payment facilities in times of banking crises.…”