Democratization and the depoliticization of the banking sector: Are all banks affected equally?

Abstract

This paper shows that the influence of the dramatic change in political ties of the Indonesian banking sector following democratization varies widely by bank ownership type. Panel estimates using several unique data-sets show that the decrease in political ties over democratization positively influences the performance of government-owned banks while negatively influencing the performance for privately held banks. Results remain robust to a variety of alternative hypotheses and sensitivity tests. This study provides evidence not only of the differential impact of depoliticization, but also suggests that the relationship between political connections and performance may be different based on bank ownership.