FOREIGN BANK PENETRATION AND ITS IMPACT ON BANKING INDUSTRIES

Abstract

The purpose of this study is to measure the impact of penetration of foreign banks in the Indonesian banking industry. The measured effects are limited to competition and efficiency during the years 2000-2011, during which was a recovery from the economic crisis in Indonesia. Panzar-Rosse measures the competition and Conjectural Variation approaches. The efficiency is measured by the Standard Profit Efficiency approach. By using panel regression method with SUR (Seemingly Unrelated Regression), we found that penetration of foreign banks will increase competition and efficiency of banking in Indonesia, especially to medium and small banks through spillover effect on domestic banking system. The increase in total assets, total loans and the amount of third party funds held by foreign banks in Indonesia will increase competition and efficiency of banks in Indonesia.