PurposeThe purpose of this paper is to examine the behavior of banking risk in the emerging economies, particularly Indonesia and contribute to the discussion on the existing policy debate regarding the impact of capital on bank risk.Design/methodology/approachThis study investigates the relationship between bank risk and capital using data on 15 Indonesian large banks between 2008 and 2015, using z-score and Delta-CoVaR to measure both idiosyncratic and systemic risks.FindingsThe empirical investigation suggests that capital has a negative and significant relationship with these risk measures. The authors also find that higher systemic risk encourages banks to increase their capital. However, similar evidence is not found in the idiosyncratic risk models. Finally, the role of capital in reducing risk is considered robust only during the normal periods, as banks may increase their assets risk during times of financial distress.Originality/valueSystemic risk (CoVaR) is used to represent bank risk. This study focuses on the Indonesian banking sector (capture institutional arrangements and regulatory environment). It covers the period of 2008 GFC and post-crisis period.
Journal of Financial Economic Policy – Emerald Publishing
Published: Apr 3, 2018
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