Moderation of Interest Rate Policy Towards Banking Profitability

Abstract

Purpose: The study aims to analyze the factors that affect the profitability of the banking industry, by making interest rate policy a moderation. Design/methodology/approach: This study uses Structural Equation Modeling (SEM) analysis with panel data from 31 conventional banks in Indonesia during the period 2017-2021 and groups banks based on their core capital into 3 bank groups, namely small banks, medium banks and large banks. Findings: The results showed that capitalization had a significant negative effect on profitability for small banks and medium banks, significantly positive for large banks. Liquidity risk has a significant negative effect on the profitability of large banks. Credit risk has a negative direction towards profitability, significant for small banks and large banks. The interest rate policy is significantly positive for profitability for small banks and mediating banks, negative for large banks. Interest rate policy is only able to moderate capital and credit risk to profitability for small banks. The results of the study explained that small banks are more sensitive and quick to react to changes in interest rate policy than large banks. Research, Practical & Social implications: The research period includes the pandemic period of 2020 - 2021 where the banking industry is impacted by it, so it is possible that there are several anomalous research results. The research implications suggest that banks as fundraisers and dealers are highly dependent on interest rate policy to generate profitability. Originality/value: This study examines banks based on the core capital group owned, which is one of the first studies to include interest rate policy as a moderation variable that affects profitability.