An empirical analysis of market discipline imposed by stakeholders in the Indonesian banking sector

Ridwan, Deni (2017) An empirical analysis of market discipline imposed by stakeholders in the Indonesian banking sector. PhD thesis, Victoria University.


Financial sector authorities have incorporated market discipline as an integral part of their banking regulatory frameworks. Accordingly, in Indonesia, the Basel II Capital Accord has institutionalized the market discipline as Pillar 3 to complement requirements under Pillar 1 (risk-based calculation of capital) and Pillar 2 (supervisory review process). In addition, the provision of a financial safety net (FSN) has been a key element of the policy response to recent financial crises. This provision, however, might potentially lead to moral hazard outcomes that could impair the incentives for market players to monitor and discipline financial institutions. In turn, this could incite more risky bank activities and increase the likelihood of a financial crisis. Therefore, a further investigation of the presence of market discipline and the impact of a FSN is imperative to develop a more credible policy to safeguard financial system stability, especially in developing economies such as Indonesia. This study investigates the presence of market discipline in the Indonesian banking sector as imposed by depositors, bond holders, and equity holders. The discipline by depositors is measured through the impact of bank fundamentals on the changes in the amount of deposits. Whereas, discipline by bond and equity holders is measured through the impact of bank fundamentals on bond yield spreads and equity returns, respectively. Bank fundamentals, in this study, are associated with the Capital Asset Management Earning and Liquidity (CAMEL) financial indicators that are commonly used by banking authorities to assess bank soundness. This study employs a dynamic panel data model using a sample of 95 banks, 70 bonds, and 11 equities. Regardless of the lack of ideal conditions for an effective market discipline in a developing market, the present study has identified the presence of market discipline imposed by depositors and bond holders, but no significant evidence of discipline by equity holders. Moreover, this study identified moral hazard implications of the provision of a FSN. These include the lessening of discipline by large and institutional depositors and the existence of the “too big to fail” (TBTF) perception among stakeholders.

Item type Thesis (PhD thesis)
Subjects Historical > FOR Classification > 1402 Applied Economics
Historical > FOR Classification > 1502 Banking, Finance and Investment
Historical > Faculty/School/Research Centre/Department > College of Business
Keywords finance, Indonesia, risks, risk management, investment, market discipline, banks, capital market, deposit growth, bonds, bond holders, bond yield, bond holder model, equity model, equities
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