Macroeconomic Stress Test on the Probability of Default Banking in Indonesia (Study on Conventional Banks 2007-2021)

Abstract

The role of the Bank in mobilizing is a necessity, especially related to the provision of financing facilities to economic actors in the form of loans or credit. Usually, when an economy expands, it will be followed by a procyclical trend of credit growth, which will cause banking vigilance. And cause banks to have more expectations and are too optimistic about the ability to pay customers, thus making banks less careful. Furthermore, this condition will result in excessive delays which will eventually become a nightmare during the boom or expansion of the economy. This situation will lead to the failure of the debtor in dealing with his credit, causing a nonperforming ratio, and eventually becoming a probability of default. Meanwhile, to measure the risk of a bank failure, it can use the macroeconomic stress testing method and sensitivity analysis. This study aims to measure how big the impact of macroeconomic shocks on the probability of default that will be borne by banks, as well as to see the sensitivity of the probability of default of banking to macroeconomic variable shocks. To measure the impact of macroeconomic shocks on the probability of default, the study uses regression analysis. And to determine the sensitivity of macroeconomic variables to the probability of default using the stress test method by calculating macroeconomic variable shocks. The results showed that there was a significant effect of macroeconomic variables (Real GDP, exchange rates, inflation, interest rates, and world oil prices) on the probability of bank failure. Furthermore, after calculating the stress test, the result is that of the three bank samples, only BCA Bank has the lowest stress value. Meanwhile, to see how big the Probability of Default is, when there is a shock or session on macroeconomic variables, it shows that Mandiri Bank is very sensitive to macroeconomic variable shocks compared to others.