Abstract
Bank lending in Indonesia slowed dramatically during the period 2006–2008 while, at the same time, the banks’ holdings of short-term public sector (and other riskless) securities increased substantially. For some, this provided clear evidence of a central bank-induced credit crunch arising from Bank Indonesia’s regulatory (with respect to risk-based capital and risk management requirements) and monetary policy tightening. This paper, based on Berger and Udell (Econ J 112: F32–F53, 1994) and Haselmann and Wachtel (Comp Econ Stud 49: 411–429, 2008), seeks to establish whether the credit crunch was primarily due to central bank action or to alternative supply/demand side factors for the period 2002–2008. The so-called ‘risk-based capital credit crunch’ and ‘loans examination and supervision credit crunch’ hypotheses are duly tested alongside the ‘voluntary risk-retrenchment credit crunch’ and the ‘macro demand-side’ and ‘secular decline’ hypotheses to address the question. The results, perhaps unsurprisingly, do not allow us to definitively reject any of the supply-side credit crunch hypotheses but, what little supportive evidence there is, appears to be relatively weak, especially in respect of the risk-based capital credit crunch hypothesis. Contrariwise, the ‘macro’ demand-side hypothesis secures the strongest support, with the other (i.e., the ‘secular decline’) demand-side hypothesis receiving little support. This suggests that a reduction in loan demand in the face of rising interest rates was the main reason for the sharp contraction in bank credit experienced in Indonesia during the period 2006–2008 rather than supply-side factors.
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Notes
The working paper version of this paper also looked at the impact of size (i.e., ‘SMALL’, ‘MEDIUM’ and ‘LARGE’ banks were separately identified) and bank grouping (i.e., banks were grouped into ‘SOB’. ‘FECB’, ‘NFECB’, ‘RDB’, ‘JVB’ and ‘FOB’ categories) but, in the interests of brevity, the associated results are not discussed in this paper. Note, however, the coefficients from the regressions do feature in Table 2.
Although the regulatory minimum for the risk-based capital adequacy requirement is 8 %, consistent with Basel 1 and Basel 2, BI’s informal target is 12 %. Indeed, at end—2009, the banks’ average ratio was 17.5 %, with an average Tier 1 ratio of nearly 16 % and an average leverage ratio of 10 %. Full implementation of Basel 2 is not expected before January 2014, although Pillar 1 requirements were introduced in 2011.
The variables are measured as the average of the four prior lagged quarters to allow regulators sufficient time to react to the RISK ratios.
Seasonal dummies—‘SEAS’—are used to test for any regular pattern in lending throughout the year (the fourth quarters are treated as the base group).
The ‘elements’ comprise; risk management philosophy and strategy; risk management environment; process and control; types of financial instruments; the review system of risk management; infrastructure; separation of duties; financial instruments valuation; credit risk management; market risk management; operational risk management; liquidity risk management; limit system; and data and information systems.
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We thank an anonymous referee for valuable comments and critiques which helped to substantially improve the quality of the paper.
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Mustika, G., Suryatinc, E., Hall, M.J.B. et al. Did Bank Indonesia cause the credit crunch of 2006–2008?. Rev Quant Finan Acc 44, 269–298 (2015). https://doi.org/10.1007/s11156-013-0406-4
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DOI: https://doi.org/10.1007/s11156-013-0406-4