Essays on the Indonesian banking crisis and restructuring

The East Asian financial crisis in 1997–1998 had forced the Indonesian banking authority to take actions to mitigate the banking crisis and execute a banking restructuring program. In this dissertation, I discuss issues surrounding the crisis and restructuring events. Chapter 1 presents all stylized facts that are referred to in Chapters 2–4. It starts with the history of the Indonesian banking industry from the financial liberalization period to the restructuring period. I also discuss some literature related to the East Asian financial crisis and banking crises in general. Chapter 2 focuses on the banking authority's problem in deciding to liquidate or restructure troubled banks. I show that most CAMEL indicators, which are the performance indicators for banks used in banking supervision, are significant and therefore useful in explaining the banks that are liquidated, restructured, or healthy. This chapter also finds that the "too big to fail" argument applies in the decision whether to save or freeze banks. In Chapter 3, I take advantage of the portfolio management measurements—e.g. asset profitability, liquidity, and security—to detect bank behavior during the financial crisis in response to micro and macro shocks. This chapter illustrates some examples of patterns of behavior for different groups of banks: government bank profitability and security are not significantly related to most micro shocks; foreign banks tend to increase profitability with exchange rate depreciation; and restructured banks only care about the exchange rate in determining their profitability, liquidity, and security. The analyses of asset liquidity and security reveal that in the beginning of the banking crisis most banks prefer to be liquid for precautionary reasons. Later on, however, banks would rather not place funds in riskier assets. Chapter 4 discusses the effect of heterogeneous risk aversion in banks on monetary transmission. The method in Kashyap and Stein (2000) is applied to the Indonesian banks with different degrees of risk aversion. This chapter finds that the more risk-averse banks intensify the sensitivity of their lending to their balance sheet strength when monetary policy is tightened as the smaller banks do in Kashyap and Stein (2000).