Income volatility of Indonesian banks after the Asian Financial Crisis

This paper considers the factors that determine Indonesian bank risk both before and after the Asian Financial Crisis (AFC). In the pre-AFC period, bank capital holdings are positively associated with bank revenue risk, which is attributed to a combination of regulatory laxity as well as laxity of enforcement. In the post-AFC period, capital is found to reduce bank risk in a non-linear manner. Franchise value is associated with lower bank risk, but in a non-linear manner; low levels of franchise value are associated with increased bank risk, while higher levels of franchise value result in lower bank risk. It is also concluded the low-to-medium levels of bank loan growth are associated with lower bank risk; however, high levels of loan growth are risk increasing. These results point to the importance of enforcement of regulatory oversight in reducing bank risk.