The Leading Indicator of Financial Stability in Indonesia

Financial system instability in Indonesia would lead to escalating pressures to both micro and macro condition, and also potentially induce high costs in the presence of financial rescue. Based on the global financial crisis of 19971998 and 20082009, a financial crisis could spread and has contagion issue as economy is relatively open among the countries. This study aim to identify and measure leading indicators that can be used as assessment of banking system risk, in which to some extent could demonstrate banking industry resilience. The index of banking risk consisted of credit risk, liquidity risk, and market risk that is used in this study has relatively good in explaining risk in Indonesia banking system during a period of 2000-2014. Also, some of the variables that can be used as leading indicators to stability of banking system is per GDP balance of trade, US prime loan rate, oil price, China import, and China stock market with the average lag of 5 months. The resultof the study using VAR model between the leading indicator and banking risk index shows that banking industry resilience condition remains stability to absorb potential risk looking forward with low risk until the beginning of 2015.

(Riyanto et al., LPEM-FEUI, September 3rd, 2014)

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