How Do Banks Determine Their Capital Buffer? Evidence from Indonesian Bank

Mahendra Ryansa Gallen Gagah Pratama Mahendra Ryansa Gallen Gagah Pratama,Lina Nur Hidayati Lina Nur Hidayati,Alfonso Mendoza-Velázquez,Tyas Effendi Tyas Effendi

doi:10.34001/jmer.2021.6.02.1-13

Mahendra Ryansa Gallen Gagah Pratama Mahendra Ryansa Gallen Gagah Pratama, Lina Nur Hidayati Lina Nur Hidayati + Show 2 more

Open Access

https://doi.org/10.34001/jmer.2021.6.02.1-13

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Abstract

Objective: This study aims to investigate how banks determine their capital buffer. Return on Equity (ROE), Non-Performing Loans (NPL), Capital Buffer Lag (BUFFt-1), Loan to Total Assets (LOTA), and Income Diversification (IDIV) are some of the variables examined in this study. Research Design & Methods: Purposive sampling was used to collect samples for this study. It was 20 of the 42 conventional commercial banks that were listed on the Indonesia Stock Exchange in 2012-2016. In this study, multiple regression analysis was used, as well as the ordinary and two-stage least squares methods. Findings: The results of this study have shown that the capital buffer has a negative impact on return on equality (ROE) and income diversification (IDIV). The capital buffer was affected by Lag of Capital Buffer. This research examines how a bank can make a profit from the negative impact of ROE. Based on the results of the tests, the Indonesian Bank has not pursued the highest possible capital buffer. Implications & Recommendations: Companies will use their profit to further profitable activities when they fulfill a minimum capital buffer requirement. Contribution & Value Added: The results of this study try to give an idea for the management of capital and capital buffers and to determine the ideal strategy for investors and banks to meet the Basel and Government regulation. This research tries to add insight into the internal factors that determine capital buffers at conventional commercial banks in Indonesia, as well as research references in the field of financial management, particularly capital buffers.

Highlights

Banks are business entities that carry out the intermediary function
In this research several tests were conducted (Table 6), where the first model showed the effect of Return on Equity (ROE), Non-Performing Loans (NPL), Loan to Total Assets (LOTA), Income Diversification (IDIV) on BUFF, which is a proxy of Capital Buffer
Negative results on the IDIV variable indicate that the company is more diversified, the capital buffer owned by the company will be smaller

Summary

Introduction

Banks are business entities that carry out the intermediary function (financial intermediary). Banks collect funds from parties that have excess and (surplus) in the form of deposits which channel it to parties who need funds (deficits) in the form of credit or other forms. Banks have many risks, especially during the crisis period. If the risk is realized, the bank will lose. To avoid these losses, the bank needs to have a capital buffer as safety when facing losses. The capital buffer is an important reserve fund provided to fulfill government regulations. Capital buffers are amounts of bank capital held in detention exceeding those determined by national regulations (Jokipii & Milne, 2008). The capital buffer is a difference between the Capital Adequacy Ratio (CAR) or the capital adequacy ratio in each bank with the minimum CAR

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Discussion

Conclusion