Covid-19 Pandemic and the Banking Risk Mitigation: A Lesson from the Indonesian Credit Restructuring Policy

Document Type : Research Paper

Authors

1 Department of Islamic Economics, UIN Sunan Kalijaga Yogyakarta, Yogyakarta, Indonesia

2 Department of Islamic Banking, UIN Sunan Kalijaga Yogyakarta, Yogyakarta, Indonesia

3 Department of Islamic Accounting, UIN Sunan Kalijaga Yogyakarta, Yogyakarta, Indonesia

4 Department of Islamic Finance Management, UIN Sunan Kalijaga Yogyakarta, Yogyakarta, Indonesia

Abstract

Countercyclical economic policy has recently been highly demanded to mitigate the risk of the COVID-19 pandemic, such as the credit restructuring in the banking sector. The policy is necessary, considering that the banking credit risk continues to rise due to increasing loan repayment default of debtors affected by the pandemic. The increasing credit risk in the banking sector could elevate the economic condition to a high level of systemic risk. Therefore, this study aims to analyze the impact of the credit restructuring policy from the Indonesian government on the systemic risk from the banks’ exposure. We use the Marginal Expected Shortfall (MES) estimation to measure banking systemic risk along with the amount of credit restructuring, loan, asset, and other influential variables. The results revealed that only banks with big assets benefit from the credit-restructuring program because their risk values decrease coincide with the rise of their credit-restructuring amount. However, the benefit is invisible from the banks with small and medium amounts of assets. However, the overall credit restructuring policy succeeded in reducing banking systemic risk during the COVID-19 pandemic. The policy permits the debtors to postpone their maturing credits so that the banking NPL level is still within a reasonable limit. The government response to the COVID-19 pandemic varies from one country to another, while the credit restructuring policy from the Indonesian government is highly rated for the research investigation. The policy should be a global concept for banking risk mitigation during this unprecedented pandemic.

Keywords

Main Subjects

References

Acharya, V. V. (2009). A Theory of Systemic Risk and Design of Prudential Bank Regulation. Journal of Financial Stability, 5(3), 224–255.
Acharya, V. V., Pedersen, L. H., Philippon, T., & Richardson, M. (2017). Measuring Systemic Risk. Review of Financial Studies, 30(1), 2–47.
Acharya, V. V., & Steffen, S. (2013). Analyzing Systemic Risk of the European Banking Sector (247–282). In J. P. Fouque and J. A. Langsam (Eds.), Handbook on Systemic Risk. Cambridge: Cambridge University Press.
Andesfa, D., & Masdupi, E. (2019). Effect of Financial Ratio on Profitability of Comercial Banks: A Systematic Literature Review. Proceedings of the 2nd Padang International Conference on Education, Economics, Business and Accounting (PICEEBA-2 2018), 64, 700–706.
Angelo, B. C., & Luca, R. P. (2019). Debt Restructuring with Multiple Bank Relationships. Working Paper, 77, 1-66.
Ari, B. A., Chen, S., & Ratnovski, L. (2020). COVID-19 and Non-Performing Loans: Lessons from Past Crises. European Central Bank Research Bulletin, 27 Mei 202(71), 1–7.
Asmar, M. (2018). Effects of Bank-Specific Factors on the Net Interest Marginof Working Banks in Palestine. Journal of Economics and Management, 33(3), 5–24.
Baker, S. R., Bloom, N., Davis, S. J., Kost, K., Sammon, M., & Viratyosin, T. (2020). The Unprecedented Stock Market Reaction to COVID-19. The Review of Asset Pricing Studies, 10(4), 742–758.
Balgova, M., Nies, M., & Plekhanov, A. (2016). The Economic Impact of Reducing Non-Performing Loans. SSRN Electronic Journal, 193, 1-45.
Bats, J. V., & Houben, A. C. F. J. (2020). Bank-based versus Market-Based Financing: Implications for Systemic Risk. Journal of Banking & Finance, 114, 1-20.
Battaglia, F., & Gallo, A. (2013). Securitization and Systemic Risk : An Empirical Investigation on Italian Banks over The Fi Nancial Crisis. International Review of Financial Analysis, 30, 274-286.
BIS, FSB, & IMF. (2009). Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations. Retrieved from https://www.fsb.org/2009/11/r_091107d/
Bostandzic, D., & Weiß, G. N. F. (2018). Why do some Banks Contribute More To Global Systemic Risk? Journal of Financial Intermediation, 35, 17–40.
Brunnermeier, M. K., Dong, G. N., & Palia, D. (2020). Banks’ Noninterest Income and Systemic Risk. The Review of Corporate Finance Studies, 9, 229–255.
Cai, J., Einmahl, J. H. J., de Haan, L., & Zhou, C. (2015). Estimation of the Marginal Expected Shortfall: The Mean When a Related Variable is Extreme. Journal of the Royal Statistical Society: Series B (Statistical Methodology), 77(2), 417–442.
Caporin, M., & Santucci de Magistris, P. (2012). On the Evaluation of Marginal Expected Shortfall. Applied Economics Letters, 19(2), 175–179.
Chaibi, H., & Ftiti, Z. (2015). Credit Risk Determinants: Evidence from a Cross-Country Study. Research in International Business and Finance, 33, 1–16.
De Jonghe, O., Diepstraten, M., & Schepens, G. (2015). Banks’ Size, Scope and Systemic Risk: What Role for Conflicts of Interest? Journal of Banking & Finance, 61, S3–S13.
Derbali, A., & Hallara, S. (2016). Systemic Risk of European Financial Institutions: Estimation and Ranking by the Marginal Expected Shortfall. Research in International Business and Finance, 37, 113–134.
Didier, T., Huneeus, F., Larrain, M., & Schmukler, S. (2020). Financing Firms in Hibernation during the COVID-19 Pandemic. SSRN Electronic Journal, 2333, 1-31.
Duho, K. C. T., Onumah, J. M., & Owodo, R. A. (2019). Bank Diversification And Performance In An Emerging Market. International Journal of Managerial Finance, 16(1), 120–138.
Gelpern, A. (2020). Systemic Corporate and Bank Restructuring in Financial Crisis. The International Lawyer, 34(1), 223–230.
Gunadi, I., Taruna, A. A., & Harun, C. A. (2013). Use of the Financial System Stability Index (ISSK) in Implementing Macroprudential Surveillance. Bank Indonesia, Working Paper, WP/15/2013, 1-56 (In Indonesian).
Huang, X., Zhou, H., & Zhu, H. (2012a). Assessing the Systemic Risk of A Heterogeneous Portfolio of Banks during the Recent Financial Crisis. Journal of Financial Stability, 8(3), 193–205.
Huang, X., Zhou, H., & Zhu, H. (2012b). Systemic Risk Contributions. Journal of Financial Services Research, 42(1–2), 55–83.
Idier, J., Lamé, G., & Mésonnier, J. (2014). How Useful is the Marginal Expected Shortfall for the Measurement of Systemic Exposure? A Practical Assessment. Journal of Banking & Finance, 47, 134–146.
Iwanicz-Drozdowska, M., Smaga, P., & Witkowski, B. (2016). Bank Restructuring in the EU: Which Way to Go? Journal of Policy Modeling, 38(3), 572–586.
Kleinow, J., Moreira, F., Strobl, S., & Vähämaa, S. (2017). Measuring Systemic Risk: A Comparison of Alternative Market-Based Approaches. Finance Research Letters, 21, 40–46.
Kutlukaya, M., & Yee, B. K. C. (2020). The Treatment of Restructured Loans for FSI Compilation. IMF Statistics, May 27(Special Issue on Covid-19), 1–8.
Lachowski, S. (1995). Restructuring of a Bad Debt Portfolio in a Commercial Bank in the Midst of an Economic Transition Period - Case Study: Powszechny Bank Gospodarczy W Łodzi. SSRN Electronic Journal, 57, 1-53.
Lee, H. C. (2007). Efficient and Inefficient Debt Restructuring: A Comparative Analysis of Voting Rules in Workouts. Cornell International Law Journal, 40(3), 1-31.
Lee, J. H., Ryu, J., & Tsomocos, D. P. (2013). Measures of Systemic Risk and Financial Fragility in Korea. Annals of Finance, 9(4), 757–786.
Lin, E. M. H., Sun, E. W., & Yu, M. T. (2018). Systemic Risk, Financial Markets, and Performance of Financial Institutions. Annals of Operations Research, 262(2), 579–603.
López-Espinosa, G., Moreno, A., Rubia, A., & Valderrama, L. (2012). Short-term Wholesale Funding and Systemic Risk: A Global Covar Approach. Journal of Banking & Finance, 36(12), 3150–3162.
Makri, V., Tsagkanos, A., & Bellas, A. (2014). Determinants of Non-Performing Loans: The Case of Eurozone. Panoeconomicus, 61(2), 193–206.
Mostak Ahamed, M., & Mallick, S. K. (2017). House of Restructured Assets: How Do They Affect Bank Risk in an Emerging Market? Journal of International Financial Markets, Institutions and Money, 47, 1–14.
Negurita, O., & Ionescu, E. (2017). The Impact of Restructuring of Loan Portfolios in the Banking Sector in Romania. The Free Library, 12(2), 141–148.
Qin, X., & Zhu, X. (2014). Too Non-Traditional to Fail? Determinants of Systemic Risk For Brics Banks. Applied Economics Letters, 21(4), 261–264.
Rehman, O. U. (2017). Determinants of Non-Performing Loan in South Asia: The Role of Financial Crisis. Eurasian Journal of Business and Economics, 10(20), 105–124.
Rengasamy, D. (2014). Impact of Loan Deposit Ratio (LDR) on Profitability: Panel Evidence from Commercial Banks in Malaysia. Proceedings of the 3rd International Conference on Global Business, Economics, Finance and Social Sciences, December, 1–18.
Riadi, S. (2018). The Effect of Third Parties Fund, Non Performing Loan, Capital Adequacy Ratio, Loan to Deposit Ratio, Return On Assets, Net Interest Margin and Operating Expenses Operating Income on Lending (Study in Regional Development Banks in Indonesia). Proceedings of the International Conference on Industrial Engineering and Operations Management Bandung, Indonesia, March, 1015–1026.
Saunders, A., Schmid, M., & Walter, I. (2020). Strategic Scope and Bank Performance. Journal of Financial Stability, 46(C), 1-15.
Scott, D. (2003). Wall Street Words: An A To Z Guide To Investment Terms For Today’s Investor. Boston: Houghton Mifflin Company.
Song, J. W., Ko, B., & Chang, W. (2018). Analyzing Systemic Risk Using Non-Linear Marginal Expected Shortfall and its Minimum Spanning Tree. Physica A: Statistical Mechanics and Its Applications, 491, 289–304.
Sree Rama Murthy, Y. (2004). Financial Ratios of Major Commercial Banks. SSRN Electronic Journal, 1, 1-60.
Stanko, B. B., & Zeller, T. L. (1994). Financial Ratios for the Commercial Banking Industry: Do They Measure What You Think? Journal of Business and Economic Perspectives, 20(1), 1–11.
Tarchouna, A. (2019). Shadow Prices of Non-Performing Loans and the Global Fi Nancial Crisis Empirical Evidence from US Commercial Banks, 20(5), 411–434.
Weiß, G. N. F., Bostandzic, D., & Neumann, S. (2014). What Factors Drive Systemic Risk during International Financial Crises? Journal of Banking & Finance, 41, 78–96.
World Bank. (2020). COVID-19 Outbreak: Implications on Corporate and Individual Insolvency. Retrieved from https://pubdocs.worldbank.org/en/912121588018942884/COVID-19-Outbreak-Implications-on-Corporate-and-Individual-Insolvency.pdf
Yeşilova, F. D. T. (2019). The Impact of Financial Crises on the Commercial Bank Net Interest Margins: Evidence From the Turkish Banking. International Journal of Contemporary Economics and Administrative Sciences, 9, 428–442.
Yun, J., & Moon, H. (2014). Measuring Systemic Risk in the Korean Banking Sector via Dynamic Conditional Correlation Models. Pacific-Basin Finance Journal, 27, 94–114.
Zamil, R. (2020). Expected Loss Provisioning under a Global Pandemic. Financial Stability Institute BIS, April(3), 1–7.
Zhang, D., Hu, M., & Ji, Q. (2020). Financial Markets under the Global Pandemic of COVID-19. Finance Research Letters, 36(April), 101-128.
Zoller, C. B. (2020). EBRD Covid-19 Response Financial Restructuring and Insolvency. European Bank, May, 1-22.
Iranian Economic Review
Volume 27, Issue 4
December 2023
Pages 1341-1360

Files

Share

How to cite

Statistics