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Related bank deposits: Good or bad for stability?

Abstract

This paper examined the impact of related deposit transactions on banks' risk-taking and financial stability by considering the ratio of related deposits over total deposits to capture banks' dependency on deposits from their related parties. Our sample consisted of 90 Indonesian banks and covered the period 2009–2019. Our finding showed that related bank deposits significantly increased the z-score. Our deeper investigation showed that the effect of related deposits when we split the sample based on size. We find that related deposits increase the z-score only for small banks. Our results provide insights and noteworthy policy implications for regulators to take into account related party transactions in deposits to have greater control over the behavior of bank's risk-taking and to maintain the soundness of the banks, and mitigate financial instability.

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Funding

This paper was funded by Lembaga Penjamin Simpanan/LPS (Indonesia Deposit Insurance Corporation) with the contract no. PKS-1/DRSP/2017 under the LPS Call for Research 2017. The views expressed in this paper are the authors’ only and do not necessarily reflect those of Indonesia Deposit Insurance Corporation. All errors, of course, remain with us.

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Correspondence to Irwan Trinugroho.

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Achsanta, A.F., Risfandy, T., Pamungkas, P. et al. Related bank deposits: Good or bad for stability?. Eurasian Econ Rev (2021). https://doi.org/10.1007/s40822-021-00184-3

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Keywords

  • Related bank deposits
  • Risk taking
  • Market power
  • Indonesia