Papers by Wahyoe Soedarmono
Journal of International Financial Markets, Institutions and Money, 2013
This paper investigates the impact on financial stability of bank competition in emerging markets... more This paper investigates the impact on financial stability of bank competition in emerging markets by taking into account crisis periods. Based on a broad set of commercial banks in Asia over the 1994–2009 period, the empirical results indicate that a higher degree of market power in the banking market is associated with higher capital ratios, higher income volatility and higher insolvency risk of banks. In general, although banks in less competitive markets hold more capital, the levels of capitalization are not high enough to offset the impact on default risk of higher risk taking. Nevertheless, during crisis periods, specifically the 1997 Asian crisis that has directly affected Asian banks, market power in banking has a stabilizing impact. A closer investigation however shows that such findings only hold for countries with a smaller size of the largest banks, suggesting that the impact of bank competition is conditional on the extent to which the banking industry may benefit from too-big-to-fail subsidies. Overall, this paper has policy implications for bank consolidation policies and the role of the lender of last resort.
Emerging Markets Finance and Trade, 2016
From a sample of commercial banks in the Asia-Pacific region over the 1994-2009 period, this stud... more From a sample of commercial banks in the Asia-Pacific region over the 1994-2009 period, this study highlights that banks in less competitive markets exhibit lower loan growth and higher instability. Such instability is further followed by a decline in deposit growth, suggesting that Asian banks are also subject to indirect market discipline mechanisms through bank competition. This study therefore sheds light on the importance of enhancing bank competition to overcome bank risk and strengthen financial intermediation. Likewise, this study advocates the importance of strengthening market discipline to reduce bank riskiness regardless of the degree of competition in the banking industry.
Journal of Asian Economics, 2013
This paper examines the relationship between opacity and the cost of intermediation in Asian bank... more This paper examines the relationship between opacity and the cost of intermediation in Asian banks. Using a sample of publicly traded commercial banks from 2002 to 2008, our empirical results show that higher opacity is associated with a lower intermediation cost in banking. Hence, bank managers in their efforts to overcome asymmetric information issues and to improve transparency tend to offset the higher cost of acquiring and disclosing information by increasing the cost of intermediation for entrepreneurs. Moreover, a deeper look at the country level indicates that the negative link between opacity and the cost of intermediation is reversed as globalization increases. Greater globalization therefore outweighs managerial entrenchment behavior to preserve bank opacity. Our findings highlight that bank opacity issues are even more costly in countries with higher globalization.
International Economics, 2017
This paper investigates the finance-growth nexus where bank credit is decomposed into investment,... more This paper investigates the finance-growth nexus where bank credit is decomposed into investment, consumption, and working capital credit. From a panel dataset of provinces in Indonesia, it documents that higher financial development measured by financial deepening and financial intermediation exhibits an inverted U-shaped relationship with economic growth. This non-linear effect of financial deepening is driven by both investment credit and consumption credit. These results suggest that too much investment credit and, to a lesser extent, consumption credit are detrimental to economic growth. Ultimately, only financial intermediation associated with working capital credit has a positive and monotonic impact on economic growth.
This paper extends prior literature on the link between consolidation and stability in banking us... more This paper extends prior literature on the link between consolidation and stability in banking using a single country setting. From a sample of Indonesian commercial banks over the 2010-2015 time span, we construct the Lerner index as a measure of bank market power due to
consolidation. Our empirical results document that higher bank market power tends to reduce insolvency risk and increase capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks’ market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are of particular importance for financial stability.
Research in International Business and Finance, 2017
From a sample of Islamic banks around the world from 1997 to 2012, this paper
examines whether l... more From a sample of Islamic banks around the world from 1997 to 2012, this paper
examines whether loan loss provisioning in Islamic banks is procyclical. Our
empirical findings highlight that loan loss provisioning in Islamic banks remains
procyclical, although the „expected‟ loan loss model (E-LLM) has been implemented
for Islamic banks in several countries. A closer investigation further documents that
Islamic banks also use loan loss provisions for discretionary managerial actions,
especially related to capital management in which loan loss reserves and provisions
are inflated when bank capitalization declines. Eventually, this paper highlights that
higher capitalization can mitigate the procyclicality of loan loss provisions in Islamic
banks. In other words, loan loss provisioning becomes countercyclical for Islamic
banks with higher capitalization. This paper therefore casts doubts on the adoption of
the E-LLM for Islamic banks to promote countercyclical effects, because the E-LLM
may be influenced by managerial discretion, including opportunistic capital
management using loan loss provisions that may undermine the importance of
maintaining sufficient bank capitalization.
Research in International Business and Finance, 2017
This paper investigates the interplay of abnormal loan growth, credit reporting system and system... more This paper investigates the interplay of abnormal loan growth, credit reporting system and systemic risk in banking. Based on a sample of publicly traded banks in Asia from 1998 to 2012, higher abnormal loan growth leads to higher systemic risk one year ahead. A closer investigation further suggests that better credit information coverage and private credit bureaus can stem the buildup of bank systemic risk one year ahead due to higher abnormal loan growth. Eventually, this paper offers some supports to strengthen macro-prudential regulation to limit abnormal loan growth. This paper also advocates the importance of
strengthening credit information coverage and the role of private credit bureaus in Asian countries to mitigate the negative impact of abnormal loan growth on bank systemic stability.
Drafts by Wahyoe Soedarmono
This paper attempts to investigate the feasibility of banking sector integration through a cointe... more This paper attempts to investigate the feasibility of banking sector integration through a cointegration analysis of bank systemic risk in ASEAN-5 from 1998 through 2013 by taking different financial crisis periods into consideration. Our empirical findings highlight that there is one cointegrating vector in general, suggesting that the ASEAN-5 banking sector is not completely segmented in terms of systemic risk. This suggests that the ASEAN-5 banking sector integration is plausible. A closer investigation however reveals that during the Asian financial crisis and the global financial crisis, no cointegrating vector can be detected. Hence, the ASEAN-5 banking sector is completely segmented during financial crisis. Eventually, this paper highlights that the influence of financial crisis should be taken into close consideration in the agenda of banking sector integration in ASEAN-5 to ensure the effectiveness of cross-border crisis management when the ASEAN-5 banking sector tends to be segmented. In parallel, portfolio diversification in ASEAN-5 also remains beneficial for global investors in banking.
This paper investigates whether higher financial literacy boosts demand for financial services in... more This paper investigates whether higher financial literacy boosts demand for financial services in Indonesia. Our empirical results document that individuals with higher financial literacy are associated with higher demand for bank credit. However, the positive impact of financial literacy on demand for bank credit is more pronounced for younger and highly educated population. Demand for bank credit is also higher for individuals located close to post offices, suggesting that the development of hybrid bank lending products integrated with post-office services might be worth considering. Moreover, individuals with higher financial literacy also tend to have formal savings account, although this effect is more pronounced for older population and population with higher degree of education. Finally, higher demand for formal financial services is positively driven by the availability of publicly disseminated information about formal financial services, highlighting the importance of widening public awareness programs on financial literacy and inclusion across Indonesia.
Using a survey of manufacturing firms in Indonesia from 2004 through 2013, this study documents t... more Using a survey of manufacturing firms in Indonesia from 2004 through 2013, this study documents that firms in provinces with greater financial deepening exhibit better performance regardless of the measures used for financial deepening or firm performance. Such findings hold only for firms with high levels of fixed capital, however, suggesting the presence of a firm-level threshold effect. The results do not differ between high-income and low-income provinces but do vary between highly populated and less-populated provinces. Specifically, the threshold effect related to firms' fixed capital in the finance–growth nexus occurs only for highly populated provinces. The positive effect of financial deepening on firm performance is conditional on both firm-level fixed capital and province-level population. This paper provides policy implications to promote financial deepening that boosts firm productivity in the manufacturing sector.
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Papers by Wahyoe Soedarmono
consolidation. Our empirical results document that higher bank market power tends to reduce insolvency risk and increase capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks’ market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are of particular importance for financial stability.
examines whether loan loss provisioning in Islamic banks is procyclical. Our
empirical findings highlight that loan loss provisioning in Islamic banks remains
procyclical, although the „expected‟ loan loss model (E-LLM) has been implemented
for Islamic banks in several countries. A closer investigation further documents that
Islamic banks also use loan loss provisions for discretionary managerial actions,
especially related to capital management in which loan loss reserves and provisions
are inflated when bank capitalization declines. Eventually, this paper highlights that
higher capitalization can mitigate the procyclicality of loan loss provisions in Islamic
banks. In other words, loan loss provisioning becomes countercyclical for Islamic
banks with higher capitalization. This paper therefore casts doubts on the adoption of
the E-LLM for Islamic banks to promote countercyclical effects, because the E-LLM
may be influenced by managerial discretion, including opportunistic capital
management using loan loss provisions that may undermine the importance of
maintaining sufficient bank capitalization.
strengthening credit information coverage and the role of private credit bureaus in Asian countries to mitigate the negative impact of abnormal loan growth on bank systemic stability.
Drafts by Wahyoe Soedarmono
consolidation. Our empirical results document that higher bank market power tends to reduce insolvency risk and increase capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks’ market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are of particular importance for financial stability.
examines whether loan loss provisioning in Islamic banks is procyclical. Our
empirical findings highlight that loan loss provisioning in Islamic banks remains
procyclical, although the „expected‟ loan loss model (E-LLM) has been implemented
for Islamic banks in several countries. A closer investigation further documents that
Islamic banks also use loan loss provisions for discretionary managerial actions,
especially related to capital management in which loan loss reserves and provisions
are inflated when bank capitalization declines. Eventually, this paper highlights that
higher capitalization can mitigate the procyclicality of loan loss provisions in Islamic
banks. In other words, loan loss provisioning becomes countercyclical for Islamic
banks with higher capitalization. This paper therefore casts doubts on the adoption of
the E-LLM for Islamic banks to promote countercyclical effects, because the E-LLM
may be influenced by managerial discretion, including opportunistic capital
management using loan loss provisions that may undermine the importance of
maintaining sufficient bank capitalization.
strengthening credit information coverage and the role of private credit bureaus in Asian countries to mitigate the negative impact of abnormal loan growth on bank systemic stability.