THE RESILIENCE OF INDONESIAN BANKING SYSTEM AND MACROECONOMIC FLUCTUATION: ISLAMIC VIS-À-VIS CONVENTIONAL

  • Muhammad Rudi Nugroho State Islamic University Sunan Kalijaga, Indonesia
  • Ahmad Syakir Kurnia Diponegoro University, Indonesia
  • Abdul Qoyum State Islamic University Sunan Kalijaga, Indonesia
  • Fitrotul Fardila State Islamic University Sunan Kalijaga, Indonesia
Keywords: Probability of default, Macro-economic stress testing, Islamic financial stability, Inclusive and sustainable growth

Abstract

This study aims to analyze the challenges of the dual banking system during macroeconomic fluctuations. By using the default probability mapping method and macroeconomic stress testing, we can measure the stability of the financial system through credit calculation. In addition, by using the stress test method, we can find information about the characteristics of the financial system in crises and its financial-related assistance in the financial system. Considering if a financial system can detect it early, the government can take preventative measures to minimize the consequences. The results of the study show that Islamic banking has a higher default probability than conventional banking. So it can be concluded that the current stability of Islamic banking is not better than conventional banking. Our findings suggest that inflation is only a macroeconomic variable that has a high level of sensitivity to the default probability of banks. Moreover, Islamic and conventional banking have different responses to the sensitivity of inflationary interventions.

References

Ajello, A., Laubach, T., López-Salido, D., & Nakata, T. (2019). Financial stability and optimal interest rate policy. International Journal of Central Banking, 2019, 279–326.
Alessi, L., & Detken, C. (2018). Identifying excessive credit growth and leverage. Journal of Financial Stability, 35, 215–225. https://doi.org/10.1016/j.jfs.2017.06.005
Ali, M. (2006). Manajemen Risiko Strategi Perbankan dan Dunia Usaha Menghadapi Tantangan Globalisasi Bisnis,. PT. Raja Grafindo Persada.
Allen, F. D. G. (2004). Financial Fragility, Liquidity, and Asset Prices. Journal of the European Economic Association.
Arpa, M., Giulini, I., Ittner, A., and Pauer, F. (2001). The Influence of Macroeconomics Developments on Austrian Banks: Implication for Banking Supervision,. BIS Paper No. 1, Basel: BIS Press & Communications,.
Arzamasov, V., & Penikas, H. (2014). A financial stability index for Israel. Procedia Computer Science, 31, 985–994. https://doi.org/10.1016/j.procs.2014.05.351
Ascarya & Yumanita., D. (2009). The Formulation of Financial Stability Index and Te Role of Islamic Banking in The Indonesian Dual Banking System. Bank Indonesia Working Paper Series 11/2009, PPSK Bank Indonesia. (2009).
Avdjiev, S., Giudici, P., & Spelta, A. (2019). Measuring contagion risk in international banking. Journal of Financial Stability. https://doi.org/10.1016/j.jfs.2019.05.014
Borio, C., Drehmann, M., & Tsatsaronis, K. (2011). Stress-testing macro stress testing: Does it live up to expectations? Bank for International Settlements. November.
Brown, S., Gray, D., & Montagnoli, A. (2019). Credit supply shocks and household leverage: Evidence from the US banking deregulation. Journal of Financial Stability, 43, 97–115. https://doi.org/10.1016/j.jfs.2019.06.002
Byrne, J. P., & Fiess, N. (2016). International capital flows to emerging markets: National and global determinants. Journal of International Money and Finance, 61, 82–100. https://doi.org/10.1016/j.jimonfin.2015.11.005
Cerutti, E., Claessens, S., & Laeven, L. (2017). The use and effectiveness of macroprudential policies: New evidence. Journal of Financial Stability, 28, 203–224. https://doi.org/10.1016/j.jfs.2015.10.004
Chorafas, D. N. (2002). Debts and the Use of Models in Evaluating Credit Risk. In D. N. Chorafas (Ed.), Modelling the Survival of Financial and Industrial Enterprises: Advantages, Challenges and Problems with the Internal Ratings-based (IRB) Method (pp. 91–112). Palgrave Macmillan UK. https://doi.org/10.1057/9780230501737_5
Diamond, D. R. R. (2001). Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking. The Journal of Political Economy.
Ferry N Idroes. (2008). Manajemen Risiko Perbankan, Pemahaman Pendekatan 3 Pilar Kesepakatan Basel II Terkait Aplikasi Regulasi dan Pelaksanaannya Di Indonesia, 2008. In Jakarta: PT. RajaGrafindo Persada.
Foglia, A. (2011). Stress Testing Credit Risk: A Survey of Authorities’ Approaches. SSRN Electronic Journal, 9–45. https://doi.org/10.2139/ssrn.1396243
Gadanecz, B., & Jayaram, K. (2009). Measures of financial stability – a review. Irving Fisher Committee (IFC) - Bank for International Settlements (BIS), 31, 365–380. https://doi.org/10.1086/663992
Hoggarth, G., Sorensen, S., & Zicchino, L. (2005). Stress Tests of UK Banks Using a VAR Approach (SSRN Scholarly Paper ID 872693). Social Science Research Network. https://papers.ssrn.com/abstract=872693
Hoggarth, G., Sorensen, S., & Zicchino, L. (2011). Stress Tests of UK Banks Using a VAR Approach. SSRN Electronic Journal, 282. https://doi.org/10.2139/ssrn.872693
Ibrahim, M. H., & Rizvi, S. A. R. (2018). Bank lending, deposits and risk-taking in times of crisis: A panel analysis of Islamic and conventional banks. Emerging Markets Review, 35, 31–47. https://doi.org/10.1016/j.ememar.2017.12.003
Jones, M. T., Hilbers, P., and Slack, G. (2004). No Title. Stress Testing Financial Systems: What to Do When the Governor Calls, Washington: IMF Working.
Mankiw, N. (1986). “The allocation of credit and financial collapse”, Quarterly Journal of Economics, Vol. 101 No. 3, pp. 455-70.
Minsky, H. (1984). Frank Hahn’s money and inflation: A review article”, Journal of Post Keynesian Economics, Vol. 6 No. 3, pp. 449-57.
Moretti, Marina., Stephanie Stolz, dan M. Swinburne. (2008). No Title. Stress Testing at the IMF. IMF Working Paper.JEL Classification: G10, G20.
Munich, A., & Surya, B. A. (2013). Stress-Testing The Indonesia Economic Sectors by Shock on ITS Macroeconomic Variable ( An Analysis of Firm-Wide Probability of Default). Indonesian Journal of Business Administration, 2(2), 137–151.
Nasica, E. (2000). Finance, Investment and Economic Fluctuations: An Analysis in the Tradition of Hyman Minsky, Edward Elgar, Cheltenham. 2000.
Neretina, E., C. Sahin, and J. D. H. (2015). Banking Stress Test Effects on Returns and Risks,. Working Papers, SSRN.
Ong, M. K. (1999). Internal Credit Risk Model, London, Risk Books,.
Pedersen, M. (2018). Credit risk and monetary pass-through—Evidence from Chile. Journal of Financial Stability, 36, 144–158. https://doi.org/10.1016/j.jfs.2018.03.005
Sahin, C., Haan, J. de, & Neretina, E. (2020). Banking stress test effects on returns and risks. Journal of Banking & Finance, 105843. https://doi.org/10.1016/j.jbankfin.2020.105843
Virtanen, T., Tölö, E., Virén, M., & Taipalus, K. (2018). Can bubble theory foresee banking crises? Journal of Financial Stability, 36, 66–81. https://doi.org/10.1016/j.jfs.2018.02.008
Vunjak, N., Milenković, N., Andrašić, J., & Pjanić, M. (2015). Stress Test Model for Measuring the Effects of the Economic Crisis on the Capital Adequacy Ratio. Acta Polytechnica Hungarica, 12(5). https://doi.org/10.12700/APH.12.5.2015.5.10
Published
2020-05-21
How to Cite
Nugroho, M., Kurnia, A., Qoyum, A., & Fardila, F. (2020). THE RESILIENCE OF INDONESIAN BANKING SYSTEM AND MACROECONOMIC FLUCTUATION: ISLAMIC VIS-À-VIS CONVENTIONAL. Journal of Islamic Monetary Economics and Finance, 6(2). https://doi.org/10.21098/jimf.v6i2.1135
Section
Articles