The Impact of Macroeconomic Structures for The Banking Stability in Indonesia

Abstract

This study aims to find the impact of macroeconomic activities on the conditions of banking stability. Macroeconomic activity is reflected in movements in economic growth, exchange rates, inflation, trade balance, and monetary policy. While the condition of banking stability is reflected in several dimensions of banking risk such as Non-Performing Loans (NPL), Loan to Deposit Ratio (LDR) and Return on Assets (ROA). This study uses the Vector Error Correction Model (VECM) analysis technique The data used is in the form of time series data from January 2011 to October 2018 due to consideration of the limited data of each variable, especially Commercial Banks (according to the metadata from the Financial Services Authority). The results of the analysis show that a decrease in production and trade capacity can cause the NPL ratio to increase, the LDR and ROA ratio falls. Also, an important finding in this study is that monetary policy tightening in the form of a BI rate has a relatively significant impact on the increase in the NPL ratio. While tightening monetary policy the BI rate is not significant to changes in the LDR and ROA ratios. The possibility of this is due to the transmission of monetary policy The BI rate has a long lag or long transmission to LDR and ROA, so that it has a relatively long-term impact. The research contribution can be one of the references for financial services authorities and bank managers in Indonesia to be able to maintain stability and performance due to the spillover effect of the macroeconomic structure.