Abstract
PurposeThis study aims to investigate the dynamic relationships between profitability, credit risk, liquidity risk and capital in Indonesian banking industry.Design/methodology/approachThe authors use a panel vector autoregression model that incorporates macroeconomic variables: growth, interest rate, foreign exchange. The analysis is based on a monthly panel data set of 88 banks spanning from January 2012 to September 2021, which comprises 10,296 bank-month observations.FindingsOur key findings highlight (i) permanent credit cost and liquidity cost pass through practices, (ii) complementary function of liquidity and capital, (iii) earning management motivated asset write off and (iv) credit risk-liquidity risk neutrality. In addition, the authors observe that the banks demonstrated resilience to macroeconomic shocks.Research limitations/implicationsOur study have shown some interesting dynamic patterns of fundamentals; nevertheless, unified theoretical underpinning of the process is still unavailable. This should be an important future reasearch avenue.Practical implicationsThe study brings significant implications for regulatory and supervisory practices aimed at enhancing the financial stability of banks.Originality/valueWe conduct estimation of Indonesian banks system in dynamic perspective and perform impulses responses.
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