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.

We examine the effect of strategic sale—the sale of banks to strategic foreign investors—on banks’ performance. The Government of Indonesia implemented such a policy as a part of bank restructuring in the aftermath of the 1998 banking crisis. Using difference-in-difference models, we find that strategic sale leads to 12%-15% cost reduction. These results are robust to the use of other estimators such as difference-in-difference matching-estimators and stochastic-frontier analysis, to that of other performance measures such as return on assets and net interest margin, and also to that of different types of samples. These suggest that strategic sale could play an important role in restructuring troubled banks in developing countries.

In short, the sale of Indonesian banks to strategic foreign investors a couple of years ago is a good thing.

That’s from a recent working paper by Parinduri and Riyanto.

[The deregulation of Indonesia's banking sector in the 1980s and 1990s] “opened the floodgates for local crony conglomerates to set up private banks and take in deposits from a trusting public.”

With no rule of law, there was no oversight and no supervision, he said.

“The foxes were running wild in the financial chicken coop and no one, …pressured the Indonesians to design safeguards to protect the public’s deposits,” he said. One result was the 1997-98 financial crisis “that plunged tens of millions into abject poverty.”

That’s Jeffrey Winters of Northwestern University’s take on Indonesia’s banking deregulation. The language, it is a bit too colorful for my taste. And, don’t you think his assessment is over the top?

By the way, Winters is commenting on World Bank President Paul Wolfowitz role as U.S. ambassador to Indonesia in the 1980s.