Abstract :

Banks function as financial intermediaries and are inherently exposed to risk. Capital, particularly capital buffer, is one of the tools used to absorb such risks. Therefore, this study aims to examine the relationship between capital buffer and bank risk-taking levels, specifically focusing on the non-linear relationship among commercial banks in Indonesia. The data consists of annual data from Indonesian commercial banks from 2013–2023, excluding foreign bank branches and digital banks, with a sample size of 81 banks representing a total market share of 94%. The method employed is quantile regression. The result of the study shows that there is a non-linear and U-Shaped relationship between capital buffer and bank risk-taking among commercial banks in Indonesia.

---

Keywords :

Bank Risk-Taking, Capital Buffer, Commercial Bank, Quantile Regression, Risk Management

---

References :

1. Abbas, F., Ali, S., Yousaf, I. and Wong, W.K. (2022), “Economics of risk-taking, risk-based capital and profitability: empirical evidence of Islamic banks”, Asian Academy of Management Journal of Accounting and Finance, Vol.18 No.1, pp.1-31, doi: 10.21315/-aamjaf2022.18.1.1.
2. Allen, F., Carletti, E., & Marquez, R. (2011). Credit market competition and capital regulation. Review of Financial Studies, 24(4), 983–1018. https://doi.org/10. 1093/rfs/hhp089
3. Agoraki, M.; M. Delis; and F. Pasiouras. 2011. “Regulations, Competition and Bank Risk-Taking in Transition Countries.” Journal of Financial Stability 7, no. 1: 38–48.
4. Anastasiou, D., Louri, H., Tsionas, E.G., 2019. Non-performing loans in the euro area: are core-periphery banking markets fragmented? Int. J. Financ. Econ. 24, 97–112.
5. 2010. Basel III a global regulatory framework. In Basel committee on banking supervision, Issue December. http://www.bis.org/publ/bcbs189_ dec2010.pdf.
6. Berger, A. N. 1995. The profit-structure relationship in banking tests of market-power and efficient-structure hypotheses. Journal of Money, Credit and Banking, 27(2), 404–431. https://doi.org/10.2307/2077876.
7. Berger, A.N., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. J. Bank. Financ. 21, 849–870.
8. Bitar, M., Pukthuanthong, K., & Walker, T. (2018). The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries. Journal of International Financial Markets, Institutions and Money, 53, 227–262. https://doi.org/10.1016/j. intfin.2017.12.002.
9. Catalán et al. 2020. Bank Capital and Lending: Evidence of Non-Linearity from Indonesia. Journal of Asian Economics. http://dx.doi.org/10.1016/j.asieco.2020.101199.
10. Coffinet, J., Coudert, V., Pop, A., & Pouvelle, C. (2012). Two-way interplays between capital buffers and credit growth: Evidence from French banks. Journal of international financial Markets, Institutions and Money, 22(5), 1110–1125. https://doi.org/10.1016/j. intfin.2012.05.011.
11. Danarsari, D.N., Viverita, Rokhim, R. (2018). Capital Buffer for Stronger Bank Stability: Empirical Evidence from Indonesia’s Commercial Banks. Social Science and Humanities, 26, 55-68.
12. Diamond, D.W., Rajan, R., 2000. A theory of bank capital. Journal of Finance 6, 12431–12465.
13. Ding, D., & Sickles, R. C. (2018). Frontier efficiency, capital structure, and portfolio risk: An empirical analysis of US banks. BRQ Business Research Quarterly, 21(4), 262–277. https://doi.org/10.1016/j.brq.2018.09.002.
14. Ezike, J. E & Oke, M.O, (2013). Capital Adequacy Standards, Basle Accord and Bank Performance: The Nigerian Experience (A Case Study of selected banks in Nigeria), Asian Economic and Financial Review, 3(2), 146-159.
15. Gaganis, C.; F. Pasiouras; and C. Zopounidis. 2006. “A Multicriteria Decision Framework for Measuring Banks’ Soundness Around the World. Journal of Multi-Criteria Decision Analysis 14, nos. 1–3: 103–111.
16. Ghosh, A., 2015. Banking-industry specific and regional economic determinants of non-performing loans: evidence from US states. J. Financ. Stab. 20, 93–104.
17. Guidara, A., Lai, V.S., Soumaré, I. and Tchana, F.T. (2013), “Banks’ capital buffer, risk and performance in the Canadian banking system: impact of business cycles and regulatory changes”, Journal of banking and finance, Vol. 37 No.9, pp.3373-3387, doi: 10.1016/j.jbankfin.2013.05.012
18. Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough? American Economic Review, 147–165.
19. Holmstrom, B., & Tirole, J. (1997). Financial Intermediation, Loanable Funds, and the Real Sector. Quarterly Journal of Economics, 112(3), 979–1014. https://doi.org/10.1162/003355397555316
20. Hogan, T. L. (2015). Capital and risk in commercial banking: A comparison of capital and risk-based capital ratios. The Quarterly Review of Economics and Finance, 57, 32–45
21. Jiang, H., Zhang, J., & Sun, C. (2020). How does capital buffer affect bank risk-taking? New evidence from China using quantile regression. China Economic Review, 60, 101300.
22. Jokipii, T., & Milne, A. (2011). Bank capital buffer and risk adjustment decisions. Journal of Financial Stability, 7, 165–178.
23. Klein, N., 2013. Non-performing loans in CESEE: determinants and impact on macroeconomic performance. In: IMF Working Paper No. 13.
24. Klomp Jeroen and Haan de Jakob. 2015. Bank Regulation, the Quality of Institutions, and Banking Risk in Emerging and Developing Countries: An Empirical Analysis. Emerging Markets Finance and Trade. 50 (6): 19 – 40.
25. Laeven, L., Ratnovski, L., & Tong, H. (2016). Bank size, capital, and systemic risk: Some international evidence. Journal of Banking & Finance, 69, S25–S34. https://doi.org/10.1016/j.jbankfin.2015.06.022.
26. Lee, C. C., & Hsieh, M. F. (2013). The impact of bank capital on profitability and risk in Asian banking. Journal of International Money and Finance, 32, 251–281.
27. Louzis, D.P., Vouldis, A.T., Metaxas, V.L., 2012. Macroeconomic and bank-specific determinants of non-performing loans in Greece: a comparative study of mortgage, business and consumer loan portfolios. J. Bank. Financ. 36, 1012–1027.
28. Mahdi, I. B. S., & Abbes, M. B. (2018). Relationship between capital, risk and liquidity: a comparative study between Islamic and conventional banks in MENA region. Research in International Business and Finance, 45, 588–596. https://doi.org/10.1016/j. ribaf.2017.07.113.
29. Naceur, S.B. and Kandil, M. (2009), “The impact of capital requirements on banks’ cost of intermediation and performance: the case of Egypt”, Journal of Economics and Business, Vol. 61 No. 1, pp. 70-89, doi: 10.1016/j.jeconbus.2007.12.001.
30. Nguyen Hien Thi. (2020). Impact of Bank Capital Adequacy on Bank Profitability Under Basel II Accord: Evidence from Vietnam. Journal of Economic Development, 45, 31-32.
31. Pancotto, Livia & ap Gwilym, Owain & Williams, Jonathan, 2024. “The evolution and determinants of the non-performing loan burden in Italian banking,” Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
32. Perotti, E., Ratnovski, L., & Vlahu, R. (2011). Capital regulation and tail risk. International Journal of Central Banking, 7(4), 123–163. https://doi.org/10.2139/ssrn. 1910491
33. Rajan, R. G. (2005), “Has financial development made the world riskier?”, NBER Working Papers 11728, National Bureau of Economic Research, Inc.
34. Rochet, J.C., 1992. Capital requirements and the behaviour of commercial banks. European Economic Review 36, 1137–1170.
35. Shrieves, R., & Dahl, D. (1992). The relationship between risk and Capital in Commercial Banks. Journal of Banking & Finance, 16, 439–457.
36. Shim, J. (2010). Capital-based regulation, portfolio risk and capital determination: Empirical evidence from the US property–liability insurers. Journal of Banking & Finance, 34(10), 2450–2461. https://doi.org/ 10.1016/j.jbankfin.2010.04.003.

37. Tan, Y., & Floros, C. (2013). Risk, capital and efficiency in Chinese banking. Journal of international financial Markets, Institutions and Money, 26, 378–393. https:// doi.org/10.1016/j.intfin.2013.07.009.
38. Tan, Y. (2016), “The impacts of risk and competition on bank profitability in China”, Journal of International Financial Markets Institutions and Money, Vol. 40, pp. 85-110, doi: 10.1016/j.intfin.2015.09.003
39. Zhang, J., Wang, P., & Qu, B. (2012). Bank risk taking, efficiency, and law enforcement: Evidence from Chinese city commercial banks. China Economic Review, 23(2), 284–295
40. Zhao, H.; A. Sinha; and W. Ge. 2009. “Effects of Feature Construction on Classification Performance: An Empirical Study in Bank Failure Prediction.” Expert Systems with Applications 36, no. 2 (part 2): 2633–2644.