The impact of financial and competition conglomeration policies on banking efficiency and risk in Indonesia

Teguh Supangkat,Ari Mulianta Ginting,Eleonora Sofilda,Muhammad Zilal Hamzah

doi:10.21511/bbs.15(3).2020.04

Teguh Supangkat, Ari Mulianta Ginting + Show 2 more

Open Access

https://doi.org/10.21511/bbs.15(3).2020.04

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Abstract

Financial conglomerates and bank competition play a significant role in developing efficiency levels and increased risk exposure. This study aims to formulate a conceptual model of the policy’s impact of financial conglomerates and bank competition on bank efficiency and stability risk. This research is conducted using data samples from 90 commercial banks in Indonesia from 2010 to 2017. The empirical analysis is carried out using the dynamic data panel or Generalized Method of Moments (GMM). The study results show that policies of financial conglomerates and competition have a positive effect on banking efficiency. These results support previous empirical studies, where financial conglomeration, in general, can improve banking efficiency. Furthermore, it is found that the interaction between financial conglomerates and competition has a positive effect on banking stability. The implication of this research shows that the potential risks that cause distortion become irrelevant when the banking structure is more competitive. Furthermore, this study recommends the need to build the ideal financial conglomerate institutional structure to strengthen and encourage the role of more competitive banks.

Highlights

The experience of the global financial crisis has opened the eyes of many to examine it
The overall empirical results can be concluded as follows: 1) Financial conglomerates and competition have a significant effect on banking efficiency
The empirical results of the combined impact of financial conglomerate and competition (COS⋅HHI or CON⋅HHI) policies on the level of banking efficiency (EFF1 and EFF2) show that the interaction of financial conglomerates and banking competition simultaneously influence banking efficiency. These results provide support for previous empirical results in which conglomeration, in general, can improve banking efficiency; 2) Financial conglomerates and competition significantly influence the level of banking risk

Summary

Introduction

The experience of the global financial crisis has opened the eyes of many to examine it. Analysts and regulators from various world financial institutions (World Bank, Asian Development Bank, International Monetary Fund, Islamic Development Bank) and financial business actors (both banking and non-banking) highlight financial conglomerates’ critical role in maintaining financial system stability. From the experience of the financial crisis that occurred in various parts of the world, it became increasingly aware of the importance of regulation and supervision to maintain financial system stability.

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