Did the Establishment of the Indonesia Deposit Insurance Corporation (IDIC) Significantly Impact the Performance of Indonesian Banking Industry?

Abstract

The article analyzes the impact of the establishment of the Indonesia deposit insurance corporation on bank intermediation in Indonesia. Results from technical analysis and econometric methods show that enormity of the tasks of isolating the effect of IDIC establishment on banking intermediation from the influence of other factors (high interest rate, relatively volatile exchange rate during the post IDIC period, among others). Nonetheless, in the very short term, though there is no significant difference in total bank deposits before and after IDIC establishment, the composition in growth shows a different picture. State owned banks mobilize the highest level of savings followed by private national banks, regional development banks, and foreign and joint venture banks, and there is significant difference in asset-weighted credit prior to and after the IDIC establishment, the same applies to the case of credit channeled by private national banks, and foreign and joint venture banks, and regional development banks. To a certain extent such behavior manifests what some authors have termed the indiscipline of large savers wanting to shift risks, an effect that is corroborated by a lower decrease in savings deposits placed in state owned banks compared to what occurs in national private, regional development and foreign and joint venture banks. By the same token, savings deposits placed in state owned and foreign and joint venture banks (have not been dogged by bank closures), experiencing a shallower dip compared with a steep decline in savings placed in national private national banks after IDIC establishment This behavior also points to risk aversion in savers’ behavior. The shift to savings deposits from time deposits and demand deposits, and reducing the amount per account to the maximum covered by the IDIC in the immediacy of IDIC establishment, reflect savers’ desire to redefine their risk profiles by emphasizing safety over return as the new banking regime gets established. Such a hypothesis is backed by the fact that asset weighted savings in state owned banks remained higher than in national private banks, and regional development banks, but higher in foreign and joint venture banks after IDIC establishment. Moreover, the growth in banks assets in state owned banks and regional development banks after IDIC establishment was higher than in private national and foreign and joint venture banks, signaling that state owned and regional development banks are lending more, hence more trusted as sources of funds by economic agents than private national and foreign and joint venture banks. If that holds through the long run, then there no denying the fact that IDIC establishment has to some extent altered, in some way, the behavior of savers, investors, and lenders from being passive onlookers to becoming active monitors of what goes on in the banking industry. This is because the establishment of IDIC has increased the cost for the banking institution and the individual of not doing so. Moreover, though IDIC establishment hasn’t altered fundamentally the determinants of sources of funds for commercial banks and uses to which such funds are put, has increased the sources of potential risk for banks and savers alike indicated by higher fluctuation in some credit disbursements especially to risky sectors (SMEs and agriculture), and rising levels of bank Indonesia certificates. However, analysis results show that in the long run, IDIC establishment hasn’t changed fundamentally the savings and borrowing functions in Indonesian banking system; no significant shift in savers’ behavior involving the transfer of their money from relatively longer time horizon (time deposits) to savings deposit accounts in both state and private national banks, an effect that tapers off returning savings habits to pre IDIC patterns; and in general regional and state owned banks, do not seem to gain more ground in attracting savings and source of loans, than national, private, and foreign and joint venture banks, rather the increasing dominance of national private banking institutions in bank intermediation.