Do foreign and state banks take more risk?

Abstract

This paper addresses the impact of foreign ownership, government ownership, efficiency and income diversification on the risk-taking behavior of banks in Indonesia. This research uses Z-Score to measure bank risk-taking behavior. Z-score proxies probability bank’s loss that is greater than its equity. Despite their profit, bank may suffer financial insolvency when taking too much risk. This study used a sample of 44 banks in Indonesia over the 2011–2016 period with purposive sampling method. Based on the result of the research, it can be concluded that foreign ownership can increase bank risk-taking behavior due to the barrier to entry in the form of deficiency of quality information of the borrower so that it has an impact on the increase of non-performing loan ratio. While government ownership can also increase risk-taking behavior, because banks are used by politicians to pursue political goals that cause banks to take high-risk projects with low profits. In addition, the results of this study also show that banks with low efficiency tend to increase the risk-taking behavior.