Tri-Cycles Analysis on Bank Performance: Panel Var Approach

Abstract

The previous financial crisis has revealed the importance of risk in the financial and business cycle within the economy. This paper examines relationship among three cycles in the economy, namely (i) business cycle macro risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance. We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle macro risk and its consequence to the bank performance. We use Indonesian data for period of 2005q1 to 2014q4. We use unbalanced panel data of individual banks’ balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by implementing PVAR package developed by Abrigo and Love (2015). The result shows dynamic relationship between business cycle macro risk and financial risk cycles. The study also observes prominent role of risk cycles in driving bank performance. We also show the existence of financial accelerator phenomenon in Indonesian banking system, in which financial cycles precede the business cycle macro risk.

The Behaviour of Banking Financial Stability in ASEAN‐5

“…This finding is in line with Irawan and Kacarib (2017) and Vithessonthi and Tongurai (2016) that explained countercyclical behaviour of financial stability despite having different indicators of financial stability. The four extended models (Model 2-4) basically show consistent results.…”

“…Evidence for the Indonesian banks as examined by Irawan and Kacarib (2017) shows negative relation between business cycle and risk cycle (performing loan). Evidence for the Indonesian banks as examined by Irawan and Kacarib (2017) shows negative relation between business cycle and risk cycle (performing loan).…”

“…Second line of study argues that financial stability behaves countercyclically. Evidence for the Indonesian banks as examined by Irawan and Kacarib (2017) shows negative relation between business cycle and risk cycle (performing loan). Vithessonthi and Tongurai (2016) also found that there is higher risk (lower capitalisation: equity/total asset) in the period of economic expansion for seven Southern American countries.…”

“…Figure 1 shows that banking financial stability using the world's aggregate data, in general, moved in the same direction as the economic growth. Other works found that financial stability is countercyclical (Vithessonthi & Tongurai, 2016;Irawan & Kacarib, 2017). Moreover, recent studies relating financial stability to business cycle have also revealed mixed results.…”

“…There are studies which concluded that financial stability is positively correlated with the business cycle, implying that financial stability is procyclical (Marcucci & Quagliariello, 2008;Shim, 2013;IMF, 2014;K€ ohler, 2015;Bouheni & Hasnaoui, 2017). Other works found that financial stability is countercyclical (Vithessonthi & Tongurai, 2016;Irawan & Kacarib, 2017). On the other hand, some inferred that there is no significant association between business cycle and financial stability (Uhde & Heimeshoff, 2009;Guidara et al, 2013).…”