Using dynamic panel data models, we examine the effect of capital requirement on banks’ behavior in Indonesia. We find inconclusive results. Banks tend to comply with capital requirement: They increase their capital ratio when their CAR is lower than, or falling towards, the eight percent regulatory minimum. However, most of our results are statistically significant at 20-30% level of significance only. Moreover, our results are mostly driven by private domestic banks and heavily-undercapitalized banks that were closely monitored by regulator in the aftermath of the 1998 crisis. Whether, in normal circumstances, banks in developing countries like Indonesia comply with capital requirement, therefore, remains questionable.
That’s from another recent working paper by Parinduri and Riyanto. Comments and suggestions are welcome.