Bank Risk Level and Bank Capital: The Case of the Indonesian Banking Sector

Abstract

This article analyzes the relationship between the level of bank risk and equity in Indonesian commercial banks. The 3SLS technique was used in the analysis. The findings indicate the existence of negative relationship between bank risk and equity. Banks assets and the 1997 financial crisis, positively influence the level of bank risk. The level of exchange rate and bank foreign liquidity negatively influence bank equity level. Some of the implications of the research results are the existence of incentives for banks to invest in risky assets without increasing bank equity, showing noncompliance with prudential banking principles. Increased compliance with sound banking principles should be encouraged, augmenting bank capital, and enhancing control over bank involvement in transactions denominated in foreign currency.