Valentino Budhidharma

Type of the article: Research Article

Abstract
This study examines the bidirectional association between the capital adequacy ratio (CAR) and net interest margin (NIM) in Indonesian listed commercial banks, with loan growth and market power as potential transmission channels. Using annual data from 2000 to 2024, the study estimates simultaneous-equation models by a three-stage least squares (3SLS). The common FE-3SLS sample contains 268 bank-year observations from 28 banks. Bank and year fixed effects are implemented through indicator variables, and first lags of the endogenous variables are used as internal instruments to mitigate simultaneity. Bank-cluster bootstrap inference and Monte Carlo simulation are used to evaluate the indirect effects.
The full-sample results do not show a significant relationship between CAR and loan growth, either linearly or through CAR squared. CAR is positively associated with the Lerner index but negatively associated with NIM. In the reverse direction, NIM is positively associated with the Lerner index but is not significantly associated with loan growth, while its direct association with CAR is negative. The loan-growth mediation channel is not supported by the bank-cluster bootstrap and appears only at the upper tail of CAR under Monte Carlo inference. By contrast, the Lerner-index channel is positive and supported in both directions under both inference methods. Subsample results indicate additional heterogeneity across high- and low-CAR banks. The evidence therefore points to market power as the more consistent channel linking capital adequacy and interest margins.

Acknowledgments
The authors appreciate participants at Universitas Pelita Harapan for their helpful comments and suggestions.