Outlook of Indonesia Banking Stability in 2014-2015

(This writing is available only in Bahasa Indonesia.)

Riyanto, Wahyu Pramono and Nurani Pertiwi

Executive Summary

Instability of banking system has a big impact on micro and macroeconomics conditions and could take high ‘rescue’ cost (e.g. bailout policy). Based on past experience, a financial crisis will lead to other crises and will weaken a certain country’s economy with a wider impact to other regional/international economy. The evidence of this pattern is presence on Asia financial crisis in 1997-1998 and global economic crisis in 2008-2009. Therefore, early detection of this kind of risks is very important. The purpose of this study is to develop banking risk indicators that will reflect banking sector’s vulnerability in Indonesia. These indicators could help banking stabilization effort by the officials and serve as an early warning of its vulnerability. Our study shows that (1) the banking vulnerability index can explain Indonesia banking fragility during period of 2000-2014; (2) by using business cycle method, we can obtain leading indicator variables of banking vulnerability. The leading indicators are balance of payment per GDP, consumer price index (CPI), world oil price, China’s import, and China’s stock market with an average lag of 5 months; (3) based on these leading index, Indonesia’s banking vulnerability in second semester of 2014 and early 2015 are relatively stable with very low credit, liquidity, and market risks.

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