Effects of exchange rate depreciation on commercial bank failures in Indonesia

Abstract

This paper examines the effects of exchange rate depreciation on commercial bank failures in Indonesia during the period from January 1995 to December 1999. This included the period of the Asian crisis during which the Indonesian currency depreciated by about 75% in nominal terms or 25% in real terms. The estimation results show that due to a higher amount of foreign currency assets relative to the amount of foreign currency liabilities, exchange rate depreciation led to a lower probability of bank failure. Through reduced profit on lending in foreign currency, exchange rate depreciation led to a higher probability of bank failure.