Journal of Economics and Economic Education Research (Print ISSN: 1533-3590; Online ISSN: 1533-3604)

Abstract

Market Discipline and Implicit Deposit Protection Empirical Study on the Regional Development Banks in Indonesia

Author(s): Lina Risnaeni Ahmad, Erie Febrian, Mokhammad Anwar, Aldrin Herwany

Markets generally punish banks that run operations that are too high risk or inconsiderate. However, this market discipline can be weakened by deposit insurance issued by the National Financial Services Authority or financial back up from regional governments as bank owners. This study is to investigate how depositors react to the risk level of regional development banks (RDBs) in Indonesia. This study uses monthly data from 26 RDBs operating in Indonesia, which were obtained from the Indonesian Financial Services Authority. We analyze data using Reduced Form Equation. In this approach, the first model is used to calculate the risk of each bank with the Probit equation. At this stage, the analysis used regional bank data from 2011.2 to 2015.12. The results of this model are then used as exogenous variables in the second model, Multiple Regression Equations. The second model uses data from 2016.1 to 2018.6 to reveal depositors' sensitivity to the risk of RDB. We found that because deposits were insured, depositors generally did not care about the risks of the bank's regional development being observed. The close traditional relations between regional development banks and their captive markets have effectively made the market indifferent to bank risks.