Tri-Cycles Analysis on Bank Performance: Panel VAR Approach

Denny Irawan,  Febrio Kacaribu

Abstract

The financial crisis of 2007/8 has revealed the importance of risk, besides credit, in the dynamics of financial cycle and business cycle in the economy. This study examines relationship among those three cycles in the economy (Tri-Cycles), namely (i) business cycle risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance.  We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle risk and its consequence to the bank performance. We use Indonesian data for period of 2002q1 to 2014q4. We use unbalanced panel data of individual banks’ balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by  implementing PVAR package developed by Irawan. The result shows dynamic relationship between business cycle risk and financial risk cycles. The  study also observes prominent role of risk cycles in driving bank performance. We also show the existence of financial accelerator phenomenon in  Indonesian banking system, in which financial cycles precede the business cycle risk.

JEL Classification: E320; G210; G310
Keywords: Business Cycle Risk — Credit Cycle — Bank Lending — Financial Risk

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