WP 5 2015 The Impact of Capital Adequacy ... - Bank Indonesia · the policy on bank profitability....
Transcript of WP 5 2015 The Impact of Capital Adequacy ... - Bank Indonesia · the policy on bank profitability....
WORKING PAPER
THE IMPACT OF AN INCREASE IN CAPITAL ADEQUACY REGULATION ON THE INTEREST RATE
SPREAD OF BANKS USING ACCOUNTING-BASED ANALYSIS
Ndari Surhaningsih
Tevy Chawwa
Reni Indriani
June, 2015
WP/5/2015
Conclusions, opinions, and views expressed by the authors in this paper are personal conclusions, opinions, and views of the authors and are not official conclusions, opinions, and views of Bank Indonesia.
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THE IMPACT OF AN INCREASE IN CAPITAL ADEQUACY REGULATION ON THE INTEREST RATE SPREAD OF
BANKS USING ACCOUNTING-BASED ANALYSIS
Ndari Surjaningsih 1, Tevy Chawwa2, Reni Indriani3
Abstract
This research aims to conduct an early estimate on the impact of capital adequacy policy change on bank’s interest rate spread using accounting relationship-based simulation approach to the balance sheet and income statement of a representative bank. Research result shows that 1 percent of capital adequacy ratio (CAR) increase can be covered by increasing interest rate spread of 6 basis point (bps). The calculation result is obtained from the assumption that return on equity (ROE) and bank borrowing cost do not change as well as there are no changes in the bank’s total assets and non-operational cost. If ROE and borrowing cost are assumed to be changing, the impact on interest rate spread will be smaller. Using the same method for representative bank based on BUKU, it shows that BUKU 1 needs the smallest lending spread increase (1 bps), while BUKU 4 needs the largest lending spread increase (32 bps). The factor affecting differences in the impact of an increase in capital adequacy regulation is the current bank’s ROE. The higher an ROE, the higher interest rate spread increase which is needed.
Key words : banks, regulation, Basel III, capital, liquidity, lending
spreads
JEL Classification : G21, G28, E51
1 and 2: Senior Economic Researcher and Economic Researcher in the Macroprudential Regulation and Research Group (GRMP), Department of Macroprudential Policy (DKMP), Bank Indonesia. Opinions in this paper are opinions of the authors and are not official opinions of DKMP or Bank Indonesia. E-mail: ndari @bi.go.id and [email protected].
3 Research Assistant of Macroprudential Regulation and Research Group (GRMP), Department of Macroprudential Policy (DKMP), Bank Indonesia.
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I. PREFACE
1.1 Background
The Department of Macroprudential Policy (DKMP) of Bank Indonesia is
currently developing model to explain the linkage between macroeconomic variables
and banking variables based on individual bank data under the name Financial
Macroeconometric Model Bank Indonesia (FMM BI). This model maps the
relationship and estimates various banking variables, including credit interest rate.
In the FMM BI development research phase 1 in 2014 there was an estimation of
credit interest rate with independent variables comprising cost of fund (deposit
rate) and credit risk (NPL ratio). In its development several literatures mention the
linkage between capital adequacy from regulator and bank interest rates. This year
there will be FMM framework improvement which among others includes review on
credit interest rate equation by considering additional capital adequacy regulation
as independent variables. Therefore, this research is aimed at becoming a
preliminary study to support the equation review.
Another background which underlies this research is that post-global
financial crisis the Basel Committee continues to improve on strengthening bank
capital aspect. Capital becomes an important aspect because it functions as
cushion if banks suffer losses. Admati et al. in Swamy (2014) states that the higher
capital, the lower leverage and bank’s bankruptcy risk. Several capital policies
which will be implemented are capital surcharge for Domestic Systemically
Important Banks (DSIBs), countercyclical capital buffer (CCB), and conservation
buffer. Those capital policies will be implemented in Indonesian banking in stages
starting from 2016.
In every capital policy implementation, there are arguments on the impact of
the policy on bank profitability. The increase in bank capital quantity will increase
cost of capital (BIS and Angelini et al., in Swamy, 2014) which will then increase
the weighted average cost of capital. The cost increase will then be channeled to
borrowers in form of credit interest rate increase. With the relationship, it is
important for regulators to know how much is the impact of capital policy change
on bank interest income and how much is the potential increase of bank interest
rate spread. Therefore, this research is also a starting step to see bank behavior in
facing capital policy change, especially related to interest rate changes.
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1.2 Research Purpose
The main purpose of this research is to estimate the impact of capital policy
change on profitability of Indonesian banking sector, especially on interest rate
spread of banks. The research result is expected to provide input in improving
FMM framework, which is currently under development.
1.3 Research Limitation
Several limitations from simplification of assumptions and methods used in
this research are as follows.
(1) This research assumes that cost increase due to capital is transmitted to
customers through credit interest rate increase. In reality, banks have other
strategy options, such as reducing deposit interest rate, performing asset
reallocation, lowering operational cost, etc.
(2) Estimation result is not based on optimization process in general equilibrium
condition.
(3) This research assumes that balance sheet and income statement of
representative bank is in steady state condition and does not consider
transitional period in fulfilling capital requirement increase.
(4) This research assumes that banks will maintain the buffer level of difference
between CAR and capital requirement so even then CAR is already above the
requirement, capital requirement increase will cause banks to still increase
their capital.
With the limitations, this research is expected to provide preliminary
description on bank response to changes in capital requirement with a practical
but acceptable approach.
1.4 Method of Writing
This research is constructed in four sections. The first section discusses
background, purpose, and limitation of the research. The second section explains
several literature studies as well as previous researches which are relevant with the
research. The third section discusses methodology as well as several accounting
equations which are used in estimating the impact of capital regulation change on
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interest rate spread. Then the fourth section describes general view on Indonesian
banking industry development currently as well as the data analysis. The fifth
section is conclusion and recommendation.
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II. LITERATURE STUDY
Basic literature commonly used as the base of research on impact of cost of
capital on company’s finances is the research of Modigliani Miller (1958). In the
research, Modigliani states that in a perfect capital market condition, signified by (i)
no transaction cost; (ii) no taxation imposed; (iii) no asymmetric information; and
(iv) no possibility to default, value and cost of fund of companies are not affected by
the composition of debt and capital in corporate financing. In reality with taxation,
cost of capital becomes higher than debt (R equity > R debt). It is caused by debt
interest payment which is a cost factor that will reduce the taxable profit of
companies. However, an extremely high debt will affect to an increase in risk.
Therefore, corporate will try to approach an optimal combination of debt and equity
for the company.
Banking as a company is also implementing a combined source of funds
from debt and equity. Different to other companies, there are rules for banking on
the minimum bank capital to maintain the continuity of banking activities
prudently. Bank capital adequacy is internationally regulated by the Basel Accords
issued by the Basel Committee on Banking Supervision. There are several changes
in capital adequacy regulations: Basel I (since 1988), Basel II (since 2001), and the
latest one Basel III (since 2008 crisis, but implemented in stages in 2013–2019). In
accordance with Basel III, banks are required to increase capital to be more
resilient in crisis. There are 3 types of additional capital which will be implemented:
Capital Surcharge D-SIBs, Countercyclical Capital Buffer, and Conservation Buffer.
The changes in Basel III requirements are accommodated in PBI 15/12/PBI/2013,
as follows.
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Source: Material of PBI 15/12/PBI/2013 Socialization, Department of Research and Banking Regulation, OJK.
Figure 1. Change in Minimum Capital Requirement (MCR) for Commercial Banks
There are several researches on the implication of capital increase policy in
accordance with Basel III to bank credit rate stipulation. Elliot (2010) in Swamy
(2014) used accounting-based analysis to estimate how much credit rate will
increase if banks are asked to increase equity. In the model, Elliot assumes that
banks only hold loans funded by equity, deposits, and wholesale funding, as well
that as interest revenue originated from credit is aimed to meet ROE target. Credit
rate stipulation is made to meet ROE target after covering cost of liabilities and
other fixed cost. Using FDIC (Federal Deposit Insurance Corporation) data for all
United States (US) banking system—if the ratio of common equity to credit
increases 2% and there are no other changes—banks need to raise lending spreads
around 39 bps to maintain ROE target of 15%. If ROE target can be reduced to
14.5%, lending spreads must increase 9 bps. Based on the analysis, Elliot deduces
that there is a possibility that the US banking system can face capital increase
policy and ensure that it will not have great impact to interest rate stipulation.
Simplicity and also intuitions in stipulating credit rate and alternatives that can be
made by banks to meet the higher capital level are among the strengths of Elliot
approach.
In another research, King (2010) conducts analysis on impact of capital
increase policy on lending spreads in 13 OECD countries. King compiles a
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representation from bank’s balance sheet and income statement based on their
balance sheet and income statement average for the last 15 years. With the average
lengthy period, it is assumed that the representation of balance sheet and income
statement used is in steady state condition. Furthermore there is a mapping how
the change of structure in bank capital and asset composition affects net income
components using accounting relationship. Banks are asummed to transmit cost
increase due to capital increase to interest expense borne by debtors. Despite
having limitations, the approach used by King is relatively simple and can be a
preliminary study to understand bank behavior to policy changes. Research result
concludes that cost emerging from 1% increase in capital ratio can be covered by a
lending spreads increase of 15bps under the assumption ROE and cost of debt do
not change. If ROE and cost of debt can be decreased, the impact on lending
spread will be smaller.
Swamy (2014) tried to implement the method in King’s paper for Indian
banking and conducted simulation to several banking groups. The research shows
that 1 percent of capital increase can be covered by lending spreads increase of
11.4 bps assuming there are no changes in risk weighted assets. Since 2009 there
has been no researches by Bank Indonesia which see the impact of capital
regulation increase on bank interest rates. However, there are several researches
related to the relationship between capital and interest rate. In his research on
determinant of bank interest rate spread, Purwanto (2009) uses several degree of
risk aversion bank variables which were proxied by ratio (𝐶𝐴𝑅 owned-𝐶𝐴𝑅
required)/CAR required as one of the determinants. The research using banks’
panel data in January 2002–April 2009 finds that banks with higher surplus of
CAR will have lower interest rate spread. Another related research is research on
monetary policy transmissions conducted by Dewati et al. (2009). Using banks’
panel data in January 2002–April 2009, the research concludes that liquidity and
amout of assets affect BI rate transmission to credit interest rate, while bank
capitalization is not significant in affecting the transmission. Furtheremore, Gunadi,
Deriantino, and Budiman (2011) conducted research using OLS of banking
industry data in September 2000–March 2011 and find that sensitivity of bank
credit rate to BI rate is affected by bank’s CAR condition. If bank’s CAR is more
than 19.8%, response to a 1% BI rate increase is 0.1%. Meanwhile, if bank’s CAR is
less than 19.8%, response to BI rate is higher, at 0.22%. From those researches,
there is not yet a research which specifically explains the impact of capital
regulation policy change on interest rate spread of banks.
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III. METHODOLOGY
3.1 Data and Theoritical Framework
This research was conducted by replicating the methodology used by King
(2010) and Swamy (2014), by using standard accounting relationship in the
balance sheet and income statement of banks. The components of balance sheet
and income statement have been adjusted to the Indonesian banking data. The
data used is balance sheet, income statement, and banking performance originated
from LBU with data period of 2010–2014 (December position). In this research
sharia banking was not included because of its nature of being not-interest based.
Based on the data of 107 banks, a balance sheet and income statement of
representative bank was formulated which is the weighted average of balance sheet
and income statement of individual banks in the past 5 years. As for the weight
used in average calculation of each component is total asset of each bank.
Moreover, there was composition of balance sheet and income statement
representative for each BUKU of banks. This research focuses on steady state
condition and does not consider transition period when banks try to fulfill higher
new capital requirement. Therefore, it is assumed that banks have passed through
transition phase and are able to fulfill the new capital adequacy requirement.
The impact of capital adequacy policy change will be estimated using
simulation of changes in asset and liabilities as well as income statement
composition of representative bank. Ratio of capital to RWA from representative
bank is raised 1 percent (1 pp) so banks will increase their capital. Furthermore,
assuming that asset composition is unchanged, bank’s capital increase will cause
bank lending to decline. That reduces the amount of loan interest expenses which
banks must spend and raises bank’s net income. On the other hand, there is a
decline in bank ROE ratio because net income is divided by higher capital amount.
If banks do not expect a decline in ROE, they should take measures to increase net
income from existing assets. There are several options that banks can do, among
others, by reducing operational cost or increasing non-interest income. In this
research banks are assumed to increase interest rate spread by raising credit rate
to offset ROE decline. Theoritical framework of this research is illustrated in the
scheme below.
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Figure 2. Theoritical Framework of Impact on Capital Requirement to Interest Rate Spread
Hereafter the mapping of relationship between components of bank balance
sheet and income statement used in this research will be described in the next
section.
3.2 Mapping of Balance Sheet Components Relationship
Bank’s balance sheet used in this research is simplified as follows.
Table 1. Bank Balance Sheet Components
Asset Liabilities
! Cash and placement in BI ! Third Party Funds
! Placement in other banks ! Liabilities in other banks
! Securities ! Liabilities in BI
! Credit ! Securities issued, spot, and derivative
! Other assets ! Loan
! Other liabilities
Capital
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a. Asset
Bank assets consist of components (i) cash and placement in Bank
Indonesia; (ii) placement in other banks; (iii) securities comprising spot and
derivative claims, securities, repurchase agreement (repo), claims on reverse
repurchase agreement (reverse repo); (iv) credit disbursed; and (v) other assets
consisting of acceptance claims, equity investment, impairment on financial
assets, intangible assets, fixed assets and inventory, abandoned property,
foreclosed assets, suspense account, interbranch assets, impairment on other
assets, deferred tax assets, and other assets.
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑃𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑖𝑛 𝐵𝐼 + 𝑃𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑖𝑛 𝑜𝑡ℎ𝑒𝑟 𝑏𝑎𝑛𝑘𝑠 + 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 +
𝐶𝑟𝑒𝑑𝑖𝑡 + 𝑂𝑡ℎ𝑒𝑟 𝐴𝑠𝑠𝑒𝑡𝑠
b. Liabilities:
Total bank liabilities consist of (i) third party funds (TPF) comprising
demand deposit, savings, and time deposits; (ii) liabilities to Bank Indonesia; (iii)
securities issued and derivative spot consisting of derivative spot liabilities,
repurchase agreement (repo) liabilities, and securities issued; (iv) total loans
comprising liabilities to other banks+loans; and (v) other liabilities consisting of
acceptance liabilities, margin deposit, interbranch liabilities 4 , deferred tax
liabilities, and other liabilities.
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 𝑇𝑃𝐹 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑡𝑜 𝐵𝐼 + 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 𝐼𝑠𝑠𝑢𝑒𝑑 𝑎𝑠 𝑤𝑒𝑙𝑙 𝑎𝑠 𝑆𝑝𝑜𝑡 𝑎𝑛𝑑 𝐷𝑒𝑟𝑖𝑣𝑎𝑡𝑖𝑣𝑒
+ 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 + 𝑂𝑡ℎ𝑒𝑟 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
c. Equity
Equity is formed of loan capital, paid-in capital, additional paid-in
capital, difference in fixed assets revaluation, reserves, previous year income,
and current year income. Capital amount can be approached by total assets
subtracted by liabilities. For domestic banks, capital calculation is taken
directly from banks’ balance sheet data, while for foreign banks, capital
calculation is made by considering total foreign capital derived from data of
foreign banks’ capital components (MCR data).
4 Specifically for Foreign Bank Branch Offices there will be reduction of interbranch liabilities with their business funds.
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3.3 Mapping of Relations between Income Statement Components
and Bank Performance
Bank’s income statement components in this research are simplified as
follows.
Table 2. Bank Income Statement Components
No. Income Statement Components
1 Interest Income
2 Interest Expense
3 Net Interest Income (1-2)
4 Non-Interest Operating Income
5 Non-Interest Operating Expense
6 Non-Interest Operating Net Revenue (4-5)
7 Net Operating Revenue (3+6)
8 Non-Operating Revenue
9 Non-Operating Expense
10 Net Non-Operating Revenue (8-9)
11 Total Profit (Current Year Profit) (7+10)
12 Current Year Tax
13 Net Profit (11-12)
14 Tax Rate (to Profit)
a. Net Interest Income
𝑁𝑒𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
b. Net Non-Interest Operating Income
Net Non-Interest Operating Income=Non-Interest Operating Income
− Non-Interest Operating Expense
c. Net Operating Income
Net Operating Income=Net Interest Income+Net Non-Interest Operating Income
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d. Net Non-Operating Income
Net Non-Operating Income=Non-Operating Income − Non-Operating Expense
e. Total Profit
Total Profit=Net Operating Income+Net Non-Operating Income
f. Tax Rate
𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑡𝑎𝑥 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑝𝑟𝑜𝑓𝑖𝑡
g. Net Profit
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 𝑃𝑟𝑜𝑓𝑖𝑡 × 1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
h. ROE
Bank’s latest and the most expensive source of funding is equity. The
relation between change in equity and bank’s return on equity (ROE) is
illustrated in the following equation.
𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
ROE is the amount of profit that will be obtained by banks from their
equity. With the increase in bank’s equity, ROE will experience a decrease and
vice versa.
i. CAR
The relation of capital increase will affect the change of CAR value as
illustrated in the following equation.
𝐶𝐴𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑅𝑊𝐴
3.4 Mapping the Impact of Increase in Capital Adequacy Requirement
a. Capital increase
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!!! = ∆𝐶𝐴𝑅×𝐴𝑇𝑀𝑅! + 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!
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b. Increase of necessary net profit
Capital increase will cause ROE ratio to decline, while banks are
assumed to be wanting to maintain ROE (ROEt+1 = ROEt). Therefore, banks
must increase net profit by increasing interest income.
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡!!! = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!!! ×𝑅𝑂𝐸!
c. Interest expense reduction
Assuming there is no change in assets, calculation of interest expense
follows this equation.
∆ 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 = ∆ 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!!! − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙!
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒!!! = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒! − ∆ 𝑡𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠 × 𝑙𝑜𝑎𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
d. Increase of interest rate spread
In line with King (2010) paper, bank interest rates follow this equation.
RTPF < Rloans < Rcapital
In a normal economic condition, the relation provides illustration that
difference in source of equity will give expected return in line with the
investment risk.
The average interest rate of banking industry in Indonesia based on
calculation result of 2010–2014 data is as follows.
Table 3. Average Interest Rate of Banking Industry
r_tpf r_interbank r_loan ROE 4.56% 5.01% 5.77% 8.54%
From the table it can be seen that banks’ ROE is relatively higher than
loan interest rate hence despite a decrease in loan interest expenses, banks still
need additional interest income to compensate increase in cost due to capital
addition.
In this research it is assumed that banks will respond capital increase
policy which causes ROE decline by increasing lending spreads. The amount of
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additional lending spreads (α) needed can be calculated with the following
formula:5
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒!!! = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 ! + 𝛼 × 𝑡𝑜𝑡𝑎𝑙 𝑙𝑜𝑎𝑛𝑠
α=profit –!"# non-operating income!!"# non-interest operating income +interest expense
t+1!!"#$%$&# !"#$%&t
total credit
3.5 Econometric Analysis
As an addition, in this research there will be econometric analysis on the
impact of change in capital requirement policy to credit interest rate with the
following model.
𝑟𝑐𝑟𝑒𝑑!! = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 + 𝛼! + 𝛽! 𝑟𝑑𝑒𝑝!!!!+ 𝛽! 𝑁𝑃𝐿!!!! + 𝛽! 𝑑(𝐶𝐴𝑅𝑅𝑢𝑙𝑒)!!!!
The method used is panel data of 107 banks (excluding sharia banks) with
data period of 2001Q1–2014Q4.
5 This research assumes that non-interest non-operating income and non-interest operation net income do not experience change due to the increase in capital requirement.
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IV. DATA ANALYSIS
4.1 Overview of Indonesian Banking Industry Development6
4.1.1 Development of Bank Assets and Capital
Total asset of Indonesian banking in 2014 reached around 5,410 trillion
rupiah. Total asset of this sector covered 78% of total assets of financial sector in
Indonesia. In the past five years, since 2010 to 2014 total asset of the banking
industry tended to have an annual increase with average growth 17% per year. The
biggest growth happened between 2010 and 2011, of 21%.
Figure 3. Total Industry Assets
In 2014 the biggest total asset growth was experienced by BUKU 1 bank
category with growth of 19% from the previous year, while BUKU 3 banks had the
least growth, of 7% from the previous year.
On capital, banks CAR experienced a decrease in 2011. However, since 2012
banking industry capital experienced an increase with CAR reaching 19.50% in
2014.
6 The numbers in this section are originated from data processing of individual banks which is used in this research following several data cleansing. Therefore, there is possibility of discrepancy with data in other publication/research.
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Figure 4. Total CAR Industry and per BUKU Category
The biggest CAR is owned by BUKU 2 banks, at 30.02% followed by BUKU 1
banks of 17.70%, and BUKU 4 of 17.12%, while BUKU 3 banks have the least CAR
among other BUKU, at 17.00%. Seeing the development of banking CAR based on
its BUKU category, it can be seen that BUKU 2, BUKU 3, and BUKU 4 banks
experience a CAR increase. However, amid the increase in CAR of banking industry
and other BUKU categories, CAR of BUKU 1 banks experienced a slight decline
entering 2014.
Minimum capital ratio which must be owned by banks based on Bank
Indonesia Regulation (PBI) is relatively unchanged since 2008–2011, at 8% of RWA.
However, starting from 2012 there is a new minimum capital requirement
regulation, at 8% of RWA with additional regulation according to CAR risk profile.
With the new regulation, the lowest CAR risk profile stands at 8%, while the
highest stands at 14%.
By comparing CAR for every bank BUKU category with the prevailing
minimum capital regulation, Indonesian banking still has strong and resilient
capital. It can be seen from the CAR of each BUKU category which remains above
the minimum capital requirement (Figure 5).
0
5
10
15
20
25
2010 2011 2012 2013 2014
CAR
CAR
%
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014
CARperBUKU
BUKU1 BUKU2 BUKU3 BUKU4
%
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014
CARBUKU1
CAR CARRiskProfile(Min) CARRiskProfile(Max)
%
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014
CARBUKU 2
CAR CARRiskProfile(Min) CARRiskProfile(Max)
%
17
Figure 5. Comparison of CAR per BUKU with Prevailing CAR Regulation
4.1.2 Development of Bank Interest Rate and ROE
On interest rate, development of credit and deposit rates tended to increase
in the past two years (2013 and 2014). Credit interest rate was at 11.44% and
deposit rate at 7.73%.
Figure 6. Weghted Average of Credit Rate and Deposit Rate
The same things is also illustrated by the development of credit rate and
deposit rates for each BUKU. Credit rate and deposit rate for each BUKU tend to
increase. Until 2012 bank lending spread is quite wide despite after 2012, lending
spread relatively declines. In 2014 the highest credit rate and deposit rate were
owned by BUKU 1 category banks with figure reaching 14.11% and 9.27%. In
average the highest interest rate spread, was the spread in BUKU 1 category banks
(4.84%), followed by BUKU 4 (4.04%), BUKU 3 (3.88%), and the lowest in BUKU 2
bank category (2.65%).
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014
CARBUKU3
CAR CARRiskProfile(Min) CARRiskProfile(Max)
%
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014
CARBUKU4
CAR CARRiskProfile(Min) CARRiskProfile(Max)
%
18
Figure 7. Weighted Average of Credit Rate and Deposit Rate per BUKU
Return on equity (ROE) of Indonesian banks experienced an increase and
decrease in the past 5 years. ROE of banking industry saw an increase in the
2010–2011 period, but then experienced a decline since 2012 to touching 8.41% in
2014. The ROE decline is in line with the decrease of bank lending spread as
discussed earlier.
Figure 8. ROE of Industry and ROE per BUKU
4.2 Representative Bank Simulation Result
The early stage of data processing is the formulation of balance sheet and
income statement of representative bank using the weighted average of individual
0
5
10
15
20
25
2010 2011 2012 2013 2014
ROE perBUKU
BUKU1 BUKU2 BUKU3 BUKU4
%
19
bank data in the past 5 years (Table 4). This representative bank is considered to
represent banking industry condition in Indonesia in general.
Table 4. Balance Sheet and Income Statement of Representative Bank
(in percentage to total assets, unless stated otherwise) Balance Sheet Components % Income Statement Components %
Cash and placement in BI 12.99 1 Interest Income 8.65 Placement in other banks 5.50 2 Interest Expense 4.80 Securities 8.70 3 Net Interest Income (1-2) 3.89 Credit 49.84 Other assets 22.97 4 Non-Interest Operating Income 1.77 Total assets 100.00 5 Non-Interest Operating Expense 4.08 6 Non-Interest Operating Net Revenue
(4-5) -2.32
Third Party Funds 55.51 7 Net Operating Revenue (3+6) 1.57 Liabilities in other banks 4.02 Liabilities in BI 0.03 8 Non-Operating Revenue 0.32 Securities issued, spot, and derivative 1.15 9 Non-Operating Expense 0.27 Loan 1.57 10 Net Non-Operating Revenue (8-9) 0.05 Other liabilities 23.43 Total liabilities 85.70 11 Total Profit (Current Year Profit) (7+10) 1.62 12 Current Year Tax 0.38 Capital 14.30 Total liabilities and total capital 100.00 13 Net Profit (11-12) 1.25 RWA 53.98 14 Tax Rate (to Profit) 23.12 Capital of CMR/RWA 22.95
In Table 4 can be seen that the largest component of bank assets is credit
(around 49.84%), followed by other assets7 (22.97%), cash and placement in BI
(12.99%), and placement in other banks (5.5%). As for the main funding source of
those assets comes from third party funds (55.51%) as well as other liabilities
(23.43%)8. Source of funds originated from capital is around 14.3% of total asset.
Other funding sources are relatively small: interbank liabilities (4.02%), loans
(1.57%), securities (1.15%), and liabilities to BI (0.03%). On average, banks’ RWA is
around 53.98% of total asset and capital/RWA ratio is around 22.95%.
If compared to representative bank in India and OECD9 countries, cash and
placement in BI percentage of representative bank in Indonesia is relatively higher.
In India, the percentage of placement in cash and central bank is around 5.6%,
while average OECD countries is only around 2.3%. Percentage of placement in
7 Other assets: acceptance claims, investment, impairment on financial assets, intangible assets, fixed assets and inventory, abandoned property, foreclosed collateral, suspense account, interbranch assets, impairment on other assets, deferred tax assets, and other assets.
8Other liabilities: acceptance liabilities, margin deposit, interbranch liabilities, deferred tax liabilities, and other liabilities.
9 Based on paper King (2010) and Swamy (2014).
20
other banks in OECD countries is relatively big, of around 12%, while in India is
relatively similar to Indonesia, at around 4.09%. Credit percentage in bank’s
balance sheet in India, OECD, and Indonesia is relatively similar, around half of
total assets. In terms of funding, percentage of source of funds from TPF in Indian
representative bank is much higher (75.65%), while banks of OECD countries only
around 43.5%. Source of funds from interbank loans in Indonesia is relatively
lower than India (9.16%) and OECD countries (12.6%). Equity role in bank funding
in Indonesia (14.30%) is relatively much higher compared to bank in India (7.12%)
or OECD countries (5.3%).
Table 4 also shows the composition of income statement of representative
bank. The largest component of bank profit is net interest income (3.89% of total
asset). Furthermore, non-interest operating expenses born by banks are relatively
higher than non-interest operating income so that net non-interest operating
income is negative (-2.32%). Therefore, total bank’s net operating income is only
around 1.57%. After added by non-operating income subtracted by taxes, bank net
profit compared to total assets (ROA) is around 1.25%.
ROA of representative bank in Indonesia is relatively higher compared to
ROA in India (0.84%) and OECD countries (0.8%). Apart from higher total profit,
the high percentage of ROA in Indonesia is also caused by relatively lower tax rate
issued by banks in average (in Indonesia only around 23% while in other countries
33%).
Using the balance sheet and income statement of aforementioned
representative bank, a simulation is conducted on the impact of 1% CAR regulation
increase policy on bank interest rate spread (Table 5). There are two approaches: (i)
if banks do not increase interest rate and ROE declines and (ii) if banks maintain
ROE by increasing interest rate. The first approach is illustrated in column B and C.
Column A is the initial value before there are changes in capital policy whose
figures come from the balance sheet and income statement of representative bank.
Column B is the amount of change which happens when capital experiences an
increase of 1%. Column C is the value of components after having a capital
increase of 1%. In column B can be seen that with RWA of 54.03% of total assets, a
capital increase of 1% affects the increase of total equity of 0.54% of total assets.
Assuming the number of total assets does not change, capital increase allows
banks to reduce the amount of loans with the same value as the total capital
increase. The decrease in loans affects the decline in interest expense of 0.03% so
21
there is an increase in current year profit of 0.03%. After subtracted by taxes, net
profit has an increase of 0.02% to 1.24%. Despite net profit is becoming higher,
due to an increase in total capital to 14.84%, bank ROE decreases 0.15% to 8.39%.
Next, calculation using the second approach is illustrated in column D and
E. Column D is the change in every component if there is a capital increase.
However, ROE is returned to the early value. Column E shows how banks can
maintain ROE decline by increasing interest rate spread. As an effort to maintain
and restore ROE to its initial value, net profit must have an increase of 0.05%.
Current year profit rises to 1.27% (up by 0.06%). Assuming there is no change in
net non-interest operating income and net non-operating income, the amount of
interest income needed to achieve the profit is 8.68%. With total credit amounting
to 49.84% of total assets, the increase in lending spreads needed to achieve the
interest income is 6 basis points (bps). Because the relation of capital increase
impact calculations using this method is linear, every 1% CAR increase will cause
lending spread increase with a multiplication of around 6 bps. The impact of
capital increase of 2% will cause lending spread increase of around 11.56 bps.
Analysis above is made under the assumption that banks do not want an
ROE decline and interest rate to change. The assumption is very conservative
because supposedly with higher capital, bank risks to default become lower. With
lower risks, ROE expectation targeted by banks should become lower. Loan interest
rate can also drop because the parties lending to banks see that bank risks are
lower. Related to the reasoning, there is an additional simulation, that is if ROE
and loan interest rate are assumed to have a decline of 5, 10, and 15 bps for every
increase of 1 pp capital regulation. Table 5 shows that lending spread increase will
not be as big as when ROE and interest rate are assumed to be unchanged. If ROE
and loan interest rate decline 5 bps for every 1pp increase of capital regulation,
lending spread will have an increase of 3.9 bps. The bigger the decline of ROE and
loan interest rate, the lower the increase of lending spread.
Table 5. Simulation on Impact of 1% Capital Regulation Increase
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Total capital of MCR/RWA 21.99 1 23 1 RWA 54.03 0 54.03 0 Total Capital 14.30 0.54 14.84 0.54 14.84
22
Table 5. (continued)
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Liabilities 1.57 -0.54 1.03 -0.54 Interbank liabilities 4.02 0.00 4.02 Total Liabilities 5.59 Lending spreads increase 0 0.06% Interest income 8.65 0.00 8.65 0.03 8.68 - interest expense 4.80 -0.03 4.77 -0.03 4.77
= net interest income 3.85 0.03 3.88 0.06 3.91 Non-interest operating income 1.77 0.00 1.77 0.00 1.77 - non-interest operating expenses 4.08 0.00 4.08 0.00 4.08
= non-interest operating net income -2.32 0.00 -2.32 0.00 -2.32 Non-operating income 0.32 0.00 0.32 0.00 0.32 - non-operating expenses 0.27 0.00 0.27 0.00 0.27
= net non-operating income 0.05 0.00 0.05 0.00 0.05 Current Year Profit 1.59 0.03 1.619 0.06 1.65 NET PROFIT 1.22 0.02 1.244 0.05 1.27 Return on Equity 8.54% -0.15% 8.39% 0.00% 8.54%
Table 6. Impact of Capital Regulation Increase on Interest Rate Spread Increase (in bps)
Capital requirement addition
(percentage)
No changes in ROE or loan
interest
Decline of ROE and loan interest of 1pp per capital requirement increase
5bps 10bps 15bps
+1 5.78 3.90 2.02 0.14
+2 11.56 7.77 3.97 0.17
+3 17.35 11.69 5.94 0.20
+4 23.13 16.32 8.59 0.87
+5 28.91 20.91 11.18 1.44
+6 34.69 25.48 13.70 1.91
4.3 Simulation Result of Representative Bank Based on BUKU
To see impact variations on capital increase to lending spread of Indonesian
banking to interest rate spread of every bank category, there is a compilation of
balance sheet and income statement of representative bank based on BUKU (can
be seen in appendix). The difference in composition of balance sheet and income
statement of banks also causes capital increase impact to every BUKU varies.
23
Table 7. Simulation on Impact of 1% Capital Regulation Increase to BUKU 1 Banks
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Total capital of MCR/RWA 22.28 1 23 1 RWA 54.88 0 54.88 0 Total Capital 14.22 0.55 14.77 0.55 14.77 Liabilities 0.55 -0.55 0.00 -0.55 Interbank liabilities 4.90 0.00 4.90 Total Liabilities 5.46 Lending spreads increase 0 0.01% Interest income 10.45 0.00 10.45 0.01 10.45 - interest expense 5.90 -0.05 5.85 -0.05 5.85
= net interest income 4.55 0.05 4.60 0.05 4.60 Non-interest operating income 0.92 0.00 0.92 0.00 0.92 - non-interest operating expenses 4.14 0.00 4.14 0.00 4.14
= non-interest operating net income -3.22 0.00 -3.22 0.00 -3.22 Non-operating income 0.40 0.00 0.40 0.00 0.40 - non-operating expenses 0.36 0.00 0.36 0.00 0.36
= net non-operating income 0.04 0.00 0.04 0.00 0.04 Current Year Profit 1.37 0.05 1.416 0.05 1.42 NET PROFIT 1.07 0.04 1.106 0.04 1.11 Return on Equity 7.53% -0.04% 7.49% 0.00% 7.53%
Table 8. Simulation on Impact of 1% Capital Regulation Increase to BUKU 2 Banks
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Total capital of MCR/RWA 23.79 1 25 1 RWA 55.27 0 55.27 0 Total Capital 16.61 0.55 17.16 0.55 17.16 Liabilities 1.33 -0.55 0.78 -0.55 Interbank liabilities 4.02 0.00 4.02 Total Liabilities 5.35 Lending spreads increase 0 0.07% Interest income 7.77 0.00 7.77 0.04 7.81 - interest expense 4.20 -0.03 4.17 -0.03 4.17
= net interest income 3.57 0.03 3.60 0.06 3.64 Non-interest operating income 2.52 0.00 2.52 0.00 2.52 - non-interest operating expenses 4.33 0.00 4.33 0.00 4.33
= non-interest operating net income -1.81 0.00 -1.81 0.00 -1.81 Non-operating income 0.18 0.00 0.18 0.00 0.18 - non-operating expenses 0.12 0.00 0.12 0.00 0.12
= net non-operating income 0.07 0.00 0.07 0.00 0.07
24
Table 8. (continued)
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Current Year Profit 1.83 0.03 1.855 0.06 1.89 NET PROFIT 1.38 0.02 1.403 0.05 1.43 Return on Equity 8.33% -0.16% 8.18% 0.00% 8.33%
Table 9. Simulation on Impact of 1% Capital Regulation Increase to BUKU 3 Banks
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Total capital of MCR/RWA 17.93 1 19 1 RWA 51.77 0 51.77 0 Total Capital 9.87 0.52 10.39 0.52 10.39 Liabilities 5.09 -0.52 4.57 -0.52 Interbank liabilities 2.47 0.00 2.47 Total Liabilities 7.55 Lending spreads increase 0 0.11% Interest income 7.26 0.00 7.26 0.05 7.31 - interest expense 4.32 -0.02 4.30 -0.02 4.30
= net interest income 2.94 0.02 2.96 0.08 3.02 Non-interest operating income 2.06 0.00 2.06 0.00 2.06 - non-interest operating expenses 3.57 0.00 3.57 0.00 3.57
= non-interest operating net income -1.51 0.00 -1.51 0.00 -1.51 Non-operating income 0.55 0.00 0.55 0.00 0.55 - non-operating expenses 0.51 0.00 0.51 0.00 0.51
= net non-operating income 0.04 0.00 0.04 0.00 0.04 Current Year Profit 1.47 0.02 1.496 0.08 1.55 NET PROFIT 1.14 0.02 1.155 0.06 1.20 Return on Equity 11.51% -0.39% 11.12% 0.00% 11.51%
Table 10. Simulation on Impact of 1% Capital Regulation Increase to BUKU 4 Banks
Without interest spread increase
With interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
Total capital of MCR/RWA 15.95 1 17 1 RWA 40.26 0 40.26 0 Total Capital 7.35 0.40 7.75 0.40 7.75 Liabilities 0.98 -0.40 0.58 -0.40 Interbank liabilities 0.76 0.00 0.76 Total Liabilities 1.74 Lending spreads increase 0 0.32% Interest income 4.96 0.00 4.96 0.11 5.08 - interest expense 1.80 -0.03 1.78 -0.03 1.78
25
Table 10. (continued)
Without interest spread increase
Without interest spread increase
(A) Initial value
(B) Changes
(C) After Changes
(D) Changes
(E) After Changes
= net interest income 3.16 0.03 3.19 0.14 3.30 Non-interest operating income 1.69 0.00 1.69 0.00 1.69 - non-interest operating expenses 2.87 0.00 2.87 0.00 2.87
= non-interest operating net income -1.18 0.00 -1.18 0.00 -1.18 Non-operating income 0.63 0.00 0.63 0.00 0.63 - non-operating expenses 0.05 0.00 0.05 0.00 0.05
= net non-operating income 0.58 0.00 0.58 0.00 0.58 Current Year Profit 2.57 0.03 2.592 0.14 2.71 NET PROFIT 2.04 0.02 2.062 0.11 2.15 Return on Equity 27.77% -1.18% 26.59% 0.00% 27.77%
Based on calculation results from Table 7 to Table 10, it can be seen that a
1% increase in capital requirement regulation provides different impact to every
BUKU. If banks do not increase interest rate spread, capital regulation increase of
1% will cause a big ROE decline (-1.18%) to BUKU 4 banks. Meanwhile, the lowest
ROE decline is experienced by BUKU 1 (-0.04%). Furthermore if banks respond by
increasing lending spread, the amount of lending spread increase will be highly
sensitive to the amount of ROE decline. BUKU 1 will make the least lending spread
increase (0.01%), while BUKU 4 will increase lending spread the biggest (0.32%).
According to King (2010) there are several factors which affect the difference
in lending spread increase among others are proportion of credit/total asset,
difference of RWA/total asset, and difference of banks’ initial ROE. Therefore, this
is the comparison of those variables for the banking industry, every bank BUKU
and the result obtained from reference paper.
Table 11. Comparison of Factors Affecting Lending Spread Difference
Credit/Asset RWA/Asset ROE Lending Spread (bps) Agregate 49.84 54.03 8.54 5.78 BUKU1 53.09 54.88 7.94 1.27 BUKU 2 48.05 55.27 8.33 7.41 BUKU 3 49.54 51.77 11.51 10.53 BUKU 4 35.74 40.26 22.03 32.18 Reference Paper King 51.6 53.33 15.5 15.0 Swamy 53.23 65.77 15 11.40
26
Plot from the variable relations to change in lending spread is presented in
this graphic below.
Figure 9. Plot of Factors Affecting Lending Spread Difference
Based on the plot above, can be seen that variables which become
differentiator of the amount of lending spread change needed is ROE variable. In
general, the higher a bank’s ROE the higher interest rate spread change due to
capital regulation increase.
4.4 Econometric Estimation Result
Econometric testing is conducted to add analysis on impact of capital
regulation change on credit interest rate and is expected to be beneficial in the
formulation of Financial Macro-econometric Model (FMM) framework being
compiled. There are two alternatives for model used: using fixed effect panel data
and random effect panel data. Fixed effect panel data is used to accommodate the
change in behavior among individual banks as assumed in FMM, while random
effect panel data is used because based on Hausman testing it is concluded that
the method is preferable to be used. The results of the two methods are relatively
similar.
27
Table 12. Estimation Result on Impact of Capital Regulation on Credit Interest Rate
Variable Fixed Effect Random Effect
C 9.21*** 9.18***
Deposit interest rate (-1) 0.65*** 0.65***
NPL (-1) 0.07*** 0.07***
Change of CAR regulation (-3) 0.15*** 0.15***
Based on the estimation result can be seen that the impact of CAR
regulation changes to interest rate is relatively small and takes time about three
quarters. With cateris paribus assumption, 1% of CAR regulation change will cause
a credit interest rate increase of 0.15%.
28
V. CONCLUSION AND RECOMMENDATION
5.1 Conclusion
This research provides initial calculation on the impact of capital
requirement policy change on bank interest rate spread. Several conclusions which
can be obtained are as follows.
1. The research shows that 1% increase of CAR ratio can be covered by increasing
interest rate spread by 6 basis points (bps). The calculation result is obtained
on assumption that return on equity (ROE) and bank lending cost do not
change as well as there are no changes in total assets and bank non-operating
expenses. If ROE and loan expenses are assumed to change, the impact to
interest rate spread will become smaller.
2. Using the same method for representative bank based on BUKU, it is obtained
that BUKU 1 needs the least lending spread increase (1 bps), followed by BUKU
2 (7 bps), BUKU 3 (11 bps), and BUKU 4 needs the highest lending spread
increase (32 bps). Factor affecting the difference in impact of capital
requirement regulation increase is the current bank ROE. The higher an ROE,
the higher the increase of interest rate spread needed.
3. Additional analysis using panel data econometric method gives result that the
impact of CAR regulation change on interest rate is relatively small and needs
time around three quarters. With cateris paribus assumption, 1% CAR
regulation change will cause a credit rate increase of 0.15%.
4. Related to benefit of this research for the improvement of FMM framework, it
can be concluded that CAR can be considered as independent variable in the
estimation of interest rate spread despite the impact is relatively small.
5. Overall, this research result is in line with previous researches conducted in
other countries as explained in the literature study. However, the impact of
capital requirement ratio increase in Indonesia (6 bps) is relatively smaller than
in OECD countries (15 bps) and in India (11.4 bps). It is considered that ROE of
representative bank in both countries is relatively higher than in Indonesia.
29
5.2 Recommendation
This research is an initial step to estimate bank response to changes in
capital requirement in a practical but acceptable approach hence it has limitations.
The main limitation is assumption that cost increase due to capital increase can
only be transmitted to customers through credit interest rate increase. Related to
the limitations, there are several recommendations which can be used in future
researches, especially when regulators want to implement new capital requirement
policy, as follows.
(1) Conducting survey to banks on their response/strategy of the new
requirement regulation implementation plan based on Basel III. From the
survey actual response from banks can be analyzed such as reducing deposit
interest rate, making asset realocation, or reducing operating expenses.
(2) Performing backtesting analysis to individual bank response on the change in
capital requirement regulation enacted in 2012Q4. This can be done by
analyzing changes in components of balance sheet, income statement, as well
as bank performance after the enactment of new regulation.
Related to the improvement of FMM framework, this research recommends
to include CAR variable in conducting interest rate estimation.
30
REFERENCE
Dewati, Wahyu et. al. 2009. “Revisiting Transmisi Kebijakan Moneter di Indonesia: Bukti Empiris dengan pendekatan VAR dan Panel Data”. Working Paper Bank Indonesia
Elliott D J. 2010.”Quantifying the effects on lending of increase capital requirements”. The Brookings Institutions, 21 September.
Gunadi I, Deriantino E dan dan Budiman. 2011. “Increasing Banking Capital for Promoting Financial Stability and Banking Response to Monetary Policy: Evidence from Indonesia”. Working Paper Bank Indonesia
King, Michael R. 2010.”Mapping Capital and Liquidity Requirements to Bank Lending Spreads”. BIS Working Papers No. 324 November 2010.
Modigliani, F and Merton H. Miiler. 1958. “The Cost of Capital, Corporation Finance and the Theory of Investment” The American Economic Review, Vol. 48, No. 3 (Jun., 1958), pp. 261–297
Purwanto, M. Noor Adhi.2009. “Faktor-Faktor Penentu Spread Suku Bunga Bank”. Occasional Paper Bank Indonesia
Repullo R and Suarez J. 2004.”Loan Pricing under Basel Capital Requirements”, Journal of Financial Intermediation 13(4): 496–521.
Ruthenberg D and Landskroner Y. 2008. “Loan Pricing under Basel II in an Imperfectly Competitive Banking Market”, Journal of Banking and Finance 32: 2725–2733.
Swamy, Vighneswara. 2014. “Modelling the Impact of New Capital Regulations on Bank Profitability”. MPRA Paper No. 58298 September 2014.
31
APPENDIX
Capital Requirement Regulation Change in Indonesia
Bank Indonesia Regulation
Article Period in Effect MCR
No 3/21/PBI/2001 Article 2 Clause (1) 2001q4 – 2008q3 8% of RWA
No 10/15/PBI/2008 Article 2 Clause (1) 2008q4 – 2012q3 8% of RWA
No 14/18/PBI/2012 Article 2 Clause (3) 2012q4 – 2013q3 8% of RWA – with adds on according to risk profile
No 15/12/PBI/2013 Article 2 Clause (3) 2013q4 - current 8% of RWA – with adds on according to risk profile
32
Balance Sheet and Income Statement of Representative Bank of Each
BUKU
BUKU 1
(in percentage to total assets, unless stated otherwise) Balance Sheet 2010 2011 2012 2013 2014 Average Cash and placement to BI 18.23 19.00 15.54 12.51 13.27 15.71 Interbank Placement 6.65 6.20 6.23 4.90 5.33 5.86 Securities 6.56 6.87 6.43 6.88 7.22 6.79 Credit 51.42 50.85 53.08 55.89 54.21 53.09 Other assets 17.15 17.07 18.72 19.82 19.97 18.55 Total assets 100.00 100.00 100.00 100.00 100.00 100.00 Third Party Funds 62.26 62.96 61.17 60.66 61.64 61.74 Interbank liabilities 4.54 4.83 5.76 5.04 4.35 4.90 Liabilities to BI 0.02 0.01 0.00 0.05 0.00 0.01 Issued securities, spot, and derivative 0.82 0.71 0.83 0.70 0.75 0.76 Loans 0.55 0.68 0.59 0.48 0.47 0.55 Other liabilities 16.32 16.08 17.78 19.05 19.83 17.81 Total Liabilities 84.50 85.25 86.13 85.98 87.04 85.78 Total Equity 15.50 14.75 13.87 14.02 12.96 14.22 Adjusted Equity 0.00 0.00 0.00 0.00 0.00 0.00 Total Equity 15.50 14.75 13.87 14.02 12.96 14.22 Total Liabilities and Total Equity 100.00 100.00 100.00 100.00 100.00 100.00 RWA/Total Asset 55.50 55.31 53.68 55.70 54.23 54.88 MCR/Total Asset 16.46 13.98 12.99 13.23 11.61 13.65 MCR/RWA 29.65 25.27 24.20 23.75 21.4 24.87 MCR/RWA Average (after excluding outlier)
25.20 24.04 21.82 20.86 19.48 22.28
Income Statement 2010 2011 2012 2013 2014 Average Interest Income 10.76 10.05 10.00 10.33 11.09 10.45 Interest Expense 5.59 5.56 5.61 5.79 6.93 5.90 Net Interest Income 5.28 4.58 4.47 4.60 4.20 4.55 Non-Interest Operating Income 1.33 1.00 0.94 0.68 0.65 0.92 Non-Interest Operating Expense 5.15 4.08 3.94 3.83 3.69 4.14 Net Non-Interest Operating Income -3.82 -3.09 -3.01 -3.16 -3.04 -3.22 Net Operating Income 1.46 1.50 1.46 1.44 1.16 1.33 Non-Operating Income 0.44 0.44 0.37 0.40 0.37 0.40 Non-Operating Expense 0.47 0.35 0.33 0.32 0.34 0.36 Net Non-Operating Income -0.03 0.09 0.04 0.08 0.03 0.04 Total Profit (current year profit) 1.42 1.59 1.50 1.53 1.19 1.44 Current year tax 0.32 0.36 0.33 0.32 0.25 0.32 Net Profit 1.11 1.23 1.18 1.20 0.93 1.13 ROE 7.14 8.32 8.48 8.58 7.18 7.94 Tax Rate 22.35 22.60 21.67 21.13 21.51 21.87
33
BUKU 2
(in percentage to total assets, unless stated otherwise) Balance Sheet 2010 2011 2012 2013 2014 Average Cash and placement to BI 13.18 13.53 12.12 10.45 10.13 11.88 Interbank Placement 8.62 7.69 6.63 5.34 5.24 6.71 Securities 11.21 11.04 8.95 10.15 10.30 10.33 Credit 45.18 45.63 49.09 51.05 49.31 48.05 Other assets 21.81 22.11 23.21 23.01 25.01 23.03 Total assets 100.00 100.00 100.00 100.00 100.00 100.00 Third Party Funds 53.21 54.13 53.03 50.28 49.17 51.96 Interbank liabilities 4.52 3.19 4.40 3.83 4.17 4.02 Liabilities to BI 0.00 0.00 0.18 0.00 0.00 0.04 Issued securities, spot, and derivative 0.88 1.20 1.06 2.01 1.27 1.28 Loans 0.82 1.41 1.13 1.15 2.13 1.33 Other liabilities 22.01 24.34 24.79 25.23 27.42 24.76 Total Liabilities 81.43 84.27 84.58 82.51 84.16 83.39 Total Equity 17.76 14.89 14.63 16.84 15.13 15.85 Adjusted Equity 0.81 0.84 0.79 0.65 0.72 0.76 Total Equity 18.57 15.73 15.42 17.49 15.84 16.61 Total Liabilities and Total Equity 100.00 100.00 100.00 100.00 100.00 100.00 RWA/Total Asset 55.43 55.72 54.18 56.02 54.99 55.27 MCR/Total Asset 17.70 14.29 13.88 16.19 14.47 15.31 MCR/RWA 31.94 25.65 25.61 28.91 26.32 27.70 MCR/RWA Average (after excluding outlier)
23.62 23.53 24.03 22.84 24.93 23.79
Income Statement 2010 2011 2012 2013 2014 Average Interest Income 8.18 7.69 7.46 7.48 8.06 7.77 Interest Expense 4.18 4.14 4.04 3.97 4.65 4.20 Net Interest Income 4.00 3.55 3.41 3.51 3.41 3.57 Non-Interest Operating Income 2.48 2.22 2.05 2.76 3.08 2.52 Non-Interest Operating Expense 4.46 4.04 3.81 4.63 4.70 4.33 Net Non-Interest Operating Income -1.98 -1.82 -1.77 -1.87 -1.62 -1.81 Net Operating Income 2.02 1.73 1.65 1.64 1.79 1.76 Non-Operating Income 0.20 0.16 0.14 0.25 0.15 0.18 Non-Operating Expense 0.14 0.08 0.09 0.13 0.14 0.12 Net Non-Operating Income 0.06 0.09 0.05 0.12 0.02 0.07 Total Profit (current year profit) 2.07 1.82 1.70 1.76 1.80 1.83 Current year tax 0.51 0.43 0.41 0.44 0.44 0.45 Net Profit 1.57 1.38 1.29 1.32 1.36 1.38 ROE 8.44 8.80 8.35 7.56 8.59 8.33 Tax Rate 24.44 23.79 24.24 24.81 24.46 24.35
34
BUKU 3
(in percentage to total assets, unless stated otherwise) Balance Sheet 2010 2011 2012 2013 2014 Average Cash and placement to BI 10.04 10.92 10.07 8.60 7.77 9.48 Interbank Placement 3.35 2.10 1.84 1.99 1.47 2.15 Securities 8.94 8.23 8.86 9.76 9.61 9.08 Credit 47.82 48.61 48.22 50.50 52.57 49.54 Other assets 29.86 30.14 31.01 29.16 28.58 29.75 Total assets 100.00 100.00 100.00 100.00 100.00 100.00 Third Party Funds 53.51 50.69 49.20 49.86 49.37 50.53 Interbank liabilities 3.19 2.48 3.02 1.88 1.78 2.47 Liabilities to BI 0.12 0.07 0.04 0.03 0.03 0.06 Issued securities, spot, and derivative 1.79 1.96 1.79 2.62 1.99 2.03 Loans 2.09 5.09 5.47 6.13 6.65 5.09 Other liabilities 29.07 29.90 31.13 29.58 29.49 29.96 Total Liabilities 90.39 90.19 90.65 90.10 89.32 90.13 Total Equity 9.58 9.76 9.30 9.88 10.63 9.83 Adjusted Equity 0.03 0.04 0.05 0.02 0.04 0.04 Total Equity 9.61 9.81 9.35 0.90 10.68 9.87 Total Liabilities and Total Equity 100.00 100.00 100.00 100.00 100.00 100.00 RWA/Total Asset 48.67 52.45 49.48 52.75 55.49 51.77 MCR/Total Asset 9.87 8.98 8.51 9.29 9.92 9.31 MCR/RWA 20.27 17.12 17.20 17.61 17.88 17.99 MCR/RWA Average (after excluding outlier)
20.03 17.09 17.34 17.52 17.65 17.93
Income Statement 2010 2011 2012 2013 2014 Average Interest Income 7.37 7.21 6.66 6.98 8.07 7.26 Interest Expense 4.26 4.27 3.76 4.14 5.18 4.32 Net Interest Income 3.11 2.95 2.90 2.84 2.89 2.94 Non-Interest Operating Income 2.70 2.13 1.62 1.99 1.86 2.06 Non-Interest Operating Expense 4.32 3.65 3.01 3.39 3.47 3.57 Net Non-Interest Operating Income -1.62 -1.52 -1.39 -1.40 -1.61 -1.51 Net Operating Income 1.49 1.43 1.51 1.44 1.28 1.43 Non-Operating Income 0.50 0.63 0.52 0.57 0.54 0.55 Non-Operating Expense 0.50 0.52 0.46 0.52 0.55 0.51 Net Non-Operating Income 0.00 0.12 0.06 0.05 -0.01 0.04 Total Profit (current year profit) 1.49 1.54 1.57 1.49 1.27 1.47 Current year tax 0.32 0.36 0.37 0.34 0.28 0.34 Net Profit 1.17 1.18 1.19 1.15 0.98 1.14 ROE 12.13 12.08 12.76 11.62 9.22 11.51 Tax Rate 21.56 23.28 23.91 22.77 22.34 22.80
35
BUKU 4
(in percentage to total assets, unless stated otherwise) Balance Sheet 2010 2011 2012 2013 2014 Average Cash and placement to BI 10.60 11.93 10.43 8.34 8.03 9.86 Interbank Placement 2.77 1.85 1.58 1.54 1.50 1.85 Securities 10.23 10.11 9.46 9.19 10.26 9.85 Credit 29.65 33.45 36.63 41.05 37.90 35.74 Other assets 46.75 42.66 41.90 39.88 42.30 42.70 Total assets 100.00 100.00 100.00 100.00 100.00 100.00 Third Party Funds 44.92 47.45 48.18 49.34 47.03 47.38 Interbank liabilities 0.73 0.90 0.71 0.68 0.78 0.76 Liabilities to BI 0.02 0.02 0.01 0.01 0.02 0.02 Issued securities, spot, and derivative 0.06 0.03 0.12 0.53 0.89 0.32 Loans 0.71 1.05 0.84 1.01 1.30 0.98 Other liabilities 47.57 43.49 42.60 40.30 41.96 43.18 Total Liabilities 94.01 92.93 92.46 91.87 91.98 92.65 Total Equity 5.99 7.07 7.54 8.13 8.02 7.35 Adjusted Equity 0.00 0.00 0.00 0.00 0.00 0.00 Total Equity 5.99 7.07 7.54 8.13 8.02 7.35 Total Liabilities and Total Equity 100.00 100.00 100.00 100.00 100.00 100.00 RWA/Total Asset 33.56 40.55 41.01 44.84 41.36 40.26 MCR/Total Asset 5.37 5.76 6.41 7.17 7.09 6.36 MCR/RWA 15.99 14.22 15.63 15.98 17.15 15.79 MCR/RWA Average (after excluding outlier)
16.49 14.54 15.69 15.93 17.08 15.95
Comparison of Interest Rate between BUKU
r_tpf r_interbank r_loan
Agregate 4.56% 5.01% 5.77%
BUKU 1 5.69% 6.00% 8.40%
BUKU 2 3.78% 4.45% 4.58%
BUKU 3 4.12% 4.63% 4.83%
BUKU 4 2.73% 2.83% 6.35%