Research Data and Results of the Depositor Model
4.4 Chapter Summary
This chapter presented the results of the empirical study on the factors affecting market discipline. The study model was formulated using a GMM approach and the data was acquired from a sample of 95 banks and covered the period of 2001 to 2011. This period represented an important episode in the evolution of the Indonesian banking sector, during which the initial impacts of some major financial reforms were observed. Of particular relevance was the introduction of a limited deposit guarantee scheme provided by the IDIC to replace a system of blanket guarantees. The findings of this chapter are summarized below in Table 4.11.
The results, in general, are consistent with the standard depositor discipline hypothesis as discussed widely in the literature. Under this hypothesis, the level of deposits is sensitive to changes in bank fundamentals after controlling for a variety of other external influences, namely the macroeconomic environment and ownership structure. The results support the proposition that an unsophisticated market is capable of instilling market discipline. Further, these results also support the view that improving information disclosure, such as the publication of certain key financial ratios, allows depositors to monitor bank risk behaviour more effectively. The ability of depositors to monitor banks is expected to encourage prudential risk management practices in the Indonesian banking sector. However, the provision of the Indonesian FSN, which reduces the risk of default, and the dependency of
150 some small banks on wholesale funds, have dampened the disciplinary influence, particularly those of sophisticated wholesale depositors.
Table 4.11 Summary of the Results
Hypotheses Indicators Results
Total deposit growth has a positive relationship with bank fundamentals
CAR Significant
NPL Significant
ROA Significant
OPEX Significant
NIM Significant
LDR Significant
BANK_SIZE Significant
DEP_IR Significant
Time deposit growth has a positive relationship with bank fundamentals
CAR Significant
NPL Significant
ROA Not significant
OPEX Significant
NIM Significant
LDR Significant
BANK_SIZE Significant Uninsured deposit growth has a positive relationship with
bank fundamentals
CAR Significant
NPL Not significant
ROA Significant
OPEX Not significant
NIM Significant
LDR Significant
BANK_SIZE Significant The correlation between deposit growth and bank
fundamental for large banks is not equal to that of small banks
BANK_SIZE Significant
The correlation between deposit growth and bank
fundamental for listed banks is not equal to that of unlisted banks
LIST_BANK Significant
The correlation between deposit growth and bank fundamental for foreign banks is not equal to that of domestic banks
FORG_BANK Significant
This study also provides some preliminary evidence that the growth of total deposits, time deposits, and uninsured deposits at large banks were generally higher than those of the small banks. This result provides strength to the TBTF perception amongst depositors. The ownership structures of a bank, in this case listed and foreign banks, have significant correlations with the level of deposits. The flow of deposits can be influenced by two dimensions: the supply side (from depositors) and the demand side (from banks). In order to assess the impact of the ownership structures of banks on depositor behaviour, further investigation is required to evaluate which of these two dimensions is more dominant. For
151 that reason, the present study up to this point could not make any reliable conclusions on how the ownership structure of a bank might influence the Indonesian depositor behaviour toward listed and foreign banks.
The volume of deposits declined following the implementation of a cap on the deposit insurance cover. If the decline in the level of deposits is a reflection of the sensitivity of Indonesian depositors to bank fundamentals, the above observation is a strong indicator that participants in Indonesian financial markets have reached a level of sophistication that is sufficient to discipline the more powerful banks. This finding is consistent with those of previous studies that provided evidence of the impact of reduced deposit insurance coverage in creating greater market discipline and limiting moral hazards.
With respect to existing literature, the disciplinary action imposed by depositors by withdrawing their deposits is consistent with empirical evidence from other developing countries, for example Colombia (Barajas & Steiner, 2000), Argentina (Calomiris & Powell, 2001), India (Ghosh & Das, 2003), Russia (Karas, Pyle, & Schoors, 2010), and China (Wu &
Bowe, 2012). In addition, the finding also provides evidence to support the argument that large banks are able to attract more deposits at lower interest rates due to TBTF perception, which is also the evidence from Argentina (Calomiris & Powell, 2001) and Colombia (Barajas & Steiner, 2000). However, in terms of discipline imposed by uninsured deposit holders, the finding is inconsistent with the empirical evidence found in Argentina, Chile, and Mexico (Martinez-Peria & Schmukler, 2001) where uninsured depositors were more effective in monitoring bank risks. The reason for this difference could be the lower reliability of the Indonesian deposit insurance program and the dependency of the banks on uninsured wholesale funds that make them willing to provide high interest as requested by wholesale depositors.
In summary, the empirical results of this study support hypothesis H1a, H1b, and H1c that the growth of total deposit, time deposit, and uninsured deposit have a positive relationship with bank fundamentals. The results also support the hypothesis H1d that the correlation between deposit and bank fundamentals for largeer banks is different from that of smaller banks.
Similarly with hypothesis H1e and H1f, the findings is that the correlation between deposit and bank fundamentals for listed banks is different from that of unlisted banks, and the correlation between deposit and bank fundamentals for foreign banks is different to that of domestic banks. These results suggest that, regardless of the lack of ideal conditions for an effective market discipline, there are strong early signs of the presence of market discipline
152 imposed by depositors in the Indonesian banking sector. Findings from this study have important policy implications for developing an environment conducive to more effective market discipline. They also highlight that the moral hazard implications of the FSN are not very strong.
The general policy implications of the study findings are presented in Chapter 7.
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