The impact of COVID-19 on bank stability: Do bank size and ownership matter?
-
DOIhttp://dx.doi.org/10.21511/bbs.17(2).2022.11
-
Article InfoVolume 17 2022, Issue #2, pp. 124-137
- Cited by
- 1077 Views
-
498 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
During the COVID-19 pandemic, bank stability became a priority for the Indonesian Financial Services Authority and the government. Economic activity is expected to be restored by muffling the shocks caused by the COVID-19 outbreak. This paper investigates the influence of COVID-19 on banking stability by differentiating bank core capital size and ownership. Using data from 108 commercial banks in Indonesia for the period March 2020 and March 2021, the paper analyzes data using fixed effects regression. The results show that COVID-19 has a detrimental and significant effect on bank stability in Indonesia. Regardless of the size and ownership of a bank’s core capital, it was found that no bank is immune for a year to the severe implications of COVID-19. This condition was experienced by both state banks and private banks, large and small. To assist in the absorption of COVID-19 shocks, this paper proposes policies for regulators that include stimulus packages and countercyclical roles in the banking system via government-owned banks.
- Keywords
-
JEL Classification (Paper profile tab)G20, G32, E42
-
References67
-
Tables8
-
Figures0
-
- Table 1. Descriptive statistics
- Table 2. Correlation matrix
- Table 3. COVID-19 and bank stability – baseline regression
- Table 4. COVID-19 and bank stability – large vs small banks
- Table 5. COVID-19 and bank stability – government vs private banks
- Table 6. COVID-19 and bank stability – robustness checks with alternative measurement of bank stability
- Table 7. COVID-19 and bank stability – robustness checks with alternative measurement of COVID-19
- Table 8. COVID-19 and bank stability – robustness checks with alternative measurement of econometric specifications
-
- Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., & Alhamadi, S. (2020). Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 27, 100326.
- Aldasoro, I., Fender I., Hardy, B., & Tarashev, N. (2020). Effects of Covid-19 on the banking sector: the market’s assessment. Bank for International Settlements.
- Alfaro, L., Chari, A., Greenland, A. N., & Schott, P. K. (2020). Aggregate and Firm-Level Stock Returns During Pandemics, in Real Time (NBER Working Paper No. 26950).
- Ali, M., Alam, N., & Rizvi, S. A. R. (2020). Coronavirus (COVID-19) – An epidemic or pandemic for financial markets. The Journal of Behavioral and Experimental Finance, 27, 100341.
- Allen, F. (1990). The Market for Information and the Origin of Financial Intermediation. Journal of Financial Intermediation, 1(1), 3-30.
- Altunbas, Y., Carbo, S., Gardener, E. P. M., & Molyneux, P. (2007). Examining the relationships between capital, risk and efficiency in European banking. European Financial Management, 13(1), 49-70.
- Altunbas, Y., Manganelli, S., & Marques-Ibanez, D. (2011). Bank Risk During the Financial Crisis – Do Business Models Matter? (ECB Working Paper No. 1394). European Central Bank, Frankfurt.
- Anh, D. L. T., & Gan, C. (2020). The impact of the COVID-19 lockdown on stock market performance: evidence from Vietnam. Journal of Economic Studies, 48(4), 836-851.
- Ari, A. (2017). Sovereign Risk and Bank Risk-Taking (IMF Working Paper No. 2017/280).
- Ashraf, B. N. (2020). Stock Markets’ Reaction to Covid-19: Cases or Fatalities. Research in International Business and Finance, 54, 101249.
- Baek, S., Mohanty, S. K., & Glambosky, M. (2020). COVID-19 and stock market volatility: An industry level analysis. Finance Research Letters, 37, 101748.
- Baker, S. R., Bloom, N., Davis, S. J., Kost, K. J., Sammon, M. C., & Viratyosin, T. (2020). The Unprecedented Stock Market Impact of COVID-19 (NBER Working Paper No. 26945).
- Baldwin, R., & di Mauro, B. W. (2020). Economics in the Time of COVID-19. London: Centre for Economic Policy Research.
- Baltagi, B. H. (2008). Econometric Analysis of Panel Data. West Sussex: John Wiley and Sons.
- Barry, T. A., Lepetit, L., & Tarazi, A. (2011). Ownership structure and risk in publicly held and privately owned banks. Journal of Banking and Finance, 35(5), 1327-1340.
- Beck, T., De Jonghe, O., & Schepens, G. (2013). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218-244.
- Berger, A. N., & Bouwman, C. H. S. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics, 109(1), 146-176.
- Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21(6), 849-870.
- Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank Competition and Financial Stability. Journal of Financial Services Research, 35, 99-118.
- Caballero, R. J., & Simsek, A. (2009). Complexity and financial panics (NBER Working Paper No. 14997).
- Cepoi, C. O. (2020). Asymmetric dependence between stock market returns and news during COVID19 financial turmoil. Finance Research Letters, 36, 101658.
- Chen, M., Jeon, B. N., Wang, R., & Wu, J. (2015). Corruption and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 24, 122-148.
- Cornett, M. M., Guo, L., Khaksari, S., & Tehranian, H. (2010). The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison. Journal of Financial Intermediation, 19(1), 74-94.
- Dahl, J., Giudici, V., Sengupta, J., Kim, S., & Ng, E., (2019). Bracing for consolidation: The quest for scale. Asia-Pacific Banking Review 2019, McKinsey & Company.
- de Haan, L., & Kakes, J. (2020). European banks after the global financial crisis: peak accumulated losses, twin crises and business models. Journal of Banking Regulation, 21, 197-211.
- Demirgüç-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and returns. Journal of Financial Economics, 98(3), 626-650.
- Demirguc-Kunt, A., Pedraza, A., & Ruiz-Ortega, C. (2020). Banking Sector Performance During the COVID-19 Crisis (Policy Research Working Paper No. 9363). Washington, DC: World Bank.
- Eichengreen, B. (1998). Exchange Rate Stability and Financial Stability. Open Economies Review, 9(1), 569-608.
- Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322.
- Erdem, O. (2020). Freedom and stock market performance during Covid-19 outbreak. Finance Research Letters, 36, 101671.
- Faia, E., Laffitte, S., & Ottaviano, G. (2019). Foreign expansion, competition and Bank risk. Journal of International Economics, 118, 179-199.
- Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2011). Efficiency and risk in European banking. Journal of Banking and Finance, 35(5), 1315-1326.
- Foos, D., Norden, L., & Weber, M. (2010). Loan growth and riskiness of banks. Journal of Banking & Finance, 34(12), 2929-2940.
- He, P., Sun, Y., Zhang, Y., & Li, T. (2020). COVID-19’s impact on stock prices across different sectors – An event study based on the Chinese stock market. Emerging Markets Finance and Trade, 56(10), 2198-2212.
- Heyden, K. J., & Heyden, T. (2020). Market reactions to the arrival and containment of COVID-19: an event study. Finance Research Letters, 38, 101745.
- Iannotta, G., Nocera, G., & Sironi, A. (2013). The impact of government ownership on bank risk. Journal of Financial Intermediation, 22(2), 152-176.
- Juhro, S. M., & Phan, D. H. B. (2018). Can economic policy uncertainty predict exchange rate and its volatility? Evidence from ASEAN countries. Buletin Ekonomi Moneter Dan Perbankan, 21(2), 251-268.
- Kamarudin, F., Sufian, F., & Nassir, A. M. (2016). Global financial crisis, ownership and bank profit efficiency in the Bangladesh’s state owned and private commercial banks. Contaduría y Administración, 61(4), 705-745.
- Khan, M. S., Scheule, H., & Wu, E. (2017). Funding liquidity and bank risk taking. Journal of Banking and Finance, 82, 203-216.
- Lepetit, L., & Strobel, F. (2013). Bank insolvency risk and time-varying Z-score measures. Journal of International Financial Markets, Institutions and Money, 25, 73-87.
- Lestari, D., Zainurossalamia, Z. A., Maria, S., Wardhani, W., & Yudaruddin, R. (2021). The impact of COVID-19 pandemic on performance of small enterprises that are e-commerce adopters and non-adopters. Problems and Perspectives in Management, 19(3), 467-477.
- Li, X., Xie, Y., & Lin, J.-H. (2020). COVID-19 outbreak, government capital injections, and shadow banking efficiency. Applied Economics, 53(4), 495-505.
- Mazur, M., Dang, M., & Vega, M. (2020). COVID-19 and the march 2020 stock market crash. Evidence from S&P1500. Finance Research Letters, 38, 101690.
- McKibbin, W., & Fernando, R. (2020). The Global Macroeconomic Impacts of COVID-19: Seven Scenarios (CAMA Working Paper No. 19/2020).
- Narayan, P. K., Phan, D. H. B., & Liu, G. (2020). COVID-19 lockdowns, stimulus packages, travel bans, and stock returns. Finance Research Letters, 38, 101732.
- Ozsoy, S. M., Rasteh, M., Yönder, E., & Yucel, M. (2020). COVID-19 Impacts on Bank Stability in a Liquidity-Backed Environment. Social Science Research Network.
- Riadi, S. S., Heksarini, A., Lestari, D., Maria, S., Zainurossalamia, S., & Yudaruddin. R. (2022). The Benefits of e-Commerce before and during the Covid-19 Pandemic for Small Enterprises in Indonesia. WSEAS Transactions on Environment and Development, 18, 69-79.
- Rizwan, M. S., Ahmada, G., & Ashraf, D. (2020). Systemic risk: The impact of COVID-19. Finance Research Letters, 36, 101682.
- Saif-Alyousfi, A. Y. H., Saha, A. & Md-Rus, R. (2020). The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries. The North American Journal of Economics and Finance, 51, 100867.
- Salisu, A. A., & Vo, X. V. (2020). Predicting stock returns in the presence of COVID-19 pandemic: The role of health news. International Review of Financial Analysis, 71, 101546.
- Schell, D., Wang, M., & Huynh, T. L. D. (2020). This time is indeed different: A study on global market reactions to public health crisis. Journal of Behavioral and Experimental Finance, 27, 100349.
- Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The Relationship Between Banking Market Competition and Risk-Taking: Do Size and Capitalization Matter? Journal of Banking & Finance, 36(12), 3366-3381.
- Topcu, M., & Gulal, O. S. (2020). The impact of COVID-19 on emerging stock markets. Finance Research Letters, 36, 101691.
- Uhde, A., & Heimeshoff, U. (2009). Consolidation in Banking and Financial Stability in Europe: Empirical Evidence. Journal of Banking & Finance, 33(7), 1299-1311.
- Vallascas, F., Mollah, S., & Keasey, K. (2017). Does the impact of board independence on large bank risks change after the global financial crisis? Journal of Corporate Finance, 44, 149-166.
- van Leuvensteijn, M., Kok-Sørensen, C., Bikker, J., & van Rixtel, A. (2013). Impact of bank competition on the interest rate pass-through in the euro area. Applied Economics, 45(11), 1359-1380.
- Varmaz, A., Fieberg, C., & Prokop, J. (2015). The value relevance of “too-big-to-fail” guarantees: Evidence from the 2008–2009 banking crisis. Journal of Risk Finance, 16(5), 498-518.
- von Borstel, J., Eickmeier, S., & Krippner, L. (2016). The interest rate pass-through in the euro area during the sovereign debt crisis. Journal of International Money and Finance, 68, 386-402.
- Wagner, W. (2007). The liquidity of bank assets and banking stability. Journal of Banking & Finance, 31(1), 121-139.
- Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data. Cambridge: The MIT Press.
- Wu, D. D., & Olson, D. L. (2020). The Effect of COVID-19 on the Banking Sector. In Pandemic Risk Management in Operations and Finance (pp. 89-99). Computational Risk Management. Cham: Springer.
- Wu, J., Yao, Y., Chen, M., & Jeon, B. N. (2020). Economic uncertainty and bank risk: Evidence from emerging economies. Journal of International Financial Markets, Institutions & Money, 68, 101242.
- Yeyati, E. L., & Micco, A. (2007). Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk. Journal of Banking & Finance, 31(6), 1633-1647.
- Yudaruddin, R. (2022). Bank Concentration and Stability in Central Asia: The Effect of Capital Regulation and Financial Freedom. Journal of Eastern European and Central Asian Research, 9(2), 206-216.
- Yusgiantoro, I., Soedarmono, W., & Tarazi, A., (2019). Bank consolidation and financial stability in Indonesia. International Economics, 159, 94-104.
- Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, 101528.
- Zoli, E. (2013). Italian Sovereign Spreads: Their Determinants and Pass-through to Bank Funding Costs and Lending Conditions (IMF Working Paper No. 13/84).