Banking Crises and Market Discipline in Indonesian Banking Industry


  • George Adam Sukoco Sikatan
  • Rokhim Rokhim



Banking crises, market discipline, bank risk taking, Indonesia.


This study analyzes the effect of banking crises towards market discipline in Indonesia. This study uses two periods of crisis in Indonesia, which are banking crisis in 1997/1998 and banking crisis in 2008. The dependent variable is market discipline; while bank risks are the independet variables (insolvency, liquidity, and credit risks). The control variables are banking level (the percentage savings of the customer, bank’s size, bank’s overhead costs, and Lerner index); industrial level (banking concentration level, the bank development); and macroeconomic variables (the growth of the real gross domestic product and inflation rate). The variables examined by the Generalized Method of Moments (GMM). This study finds a fact that on average market discipline weakens after Indonesia's banking crisis in 1997/1998. On the contrary, this study found a fact that market discipline strengthens after Indonesia's banking crisis in 2008. Eventually, this study finds a fact that there is no difference in market discipline between the domestic bank and foreign bank after Indonesia's banking crisis in 2008.


Albertazzi, U., and Gambacorta, L. (2009). Bank profitability and the business cycle. Journal of Financial Stability, 5, 393–409.

Arellano, M., and Bond, S. (1991). Some test of specification for panel data: Monte Carlo evidence and application to employment equations. Review of Economic Studies, 58, 227–297.

Athanasoglou, P.P., Brissimis, S.N., and Delis, M.D. (2008). Bank-specific, Industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18, 121–136.

Bank Indonesia. (2010). Krisis Keuangan Global dan Penyelamatan Sistem Perbankan Indonesia, Jakarta.

Beck, T., Demirgüç Kunt, A., and Maksimovic, V. (2006). The influence of financial and legal institutions on firm size. Journal of Banking and Finance, 30, 2995–3015.

Berger, A., Hannan, T.H., 1989. The priceconcentration relationship in banking. The Review of Economics and Statistics, 71, 291–299.

Cubillas, E., Fonseca, A.R., and González, F. (2012). Banking crises and market discipline: international evidence. Journal of Banking and Finance 36, 2285-2298.

Demirgüç-Kunt, A., Huizinga, H. (2004). Market discipline and deposit insurance. Journal of Monetary Economics, 51, 375–399.

Dietrich, A., and Wanzenried, G. (2010). Determinants of bank profitability before and during the crisis: evidence from Switzerland. Journal of International Financial Markets, Institu-tions, and Money, 21, 307-327.

Fonseca, A.R., and González, F., 2010. How bank capital vary across countries: the influence of cost of deposits, market power and bank regulation. Journal of Banking and Finance, 34, 892–902.

Herrero, G., Gavilá, S., and Santabárbara, D. (2009). What explains the low profitability of Chinese banks? Journal of Banking & Finance, 33, 2080–2092.

Gropp, R., Jukka, V., and Vulpes, G. (2004). Market indicators, bank fragility, and indirect market discipline. EconWPA: Finance 0411015

Gueyie, J.-P., and Lai, V.S. (2003). Bank moral hazard and the introduction of official deposit insurance in Canada. International Review of Economics and Finance, 12, 247–273.

Hadad, M.D., Agusman, A., Monroe, G.S., Gasbarro, D., and Zumwalt, J.K. (2011). Market discipline, financial crisis and regulatory changes: evidence from Indonesian banks. Journal of Banking and Finance 35, 1552–1562.

Hahm, J., and Mishkin, F.S. (2000). Causes of the Korean financial crisis: lessons for policy. NBER Working Papers, 7483.

Laeven, L., and Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93, 259–275.

Laeven, L., and Valencia, F. (2012). Systemic banking crises: an update. IMF Working Paper No. 12/163.

Mishkin, F.S. (1999). Lessons from the Asian crisis. Journal of International Money and Finance, 18, 709-723.

Naceur, S.B., and Omran, M. (2011). The effects of bank regulations, competition, and financial reforms on banks’ performance. Emerging Market Review, 12, 1-20.

Nier, E., and Baumann, U. (2006). Market discipline, disclosure and moral hazard in banking. Journal of Financial Intermediation, 15, 332–361.

Park, S., and Peristiani, S. (1998). Market discipline by thrift depositors. Journal of Money, Credit, and Banking, 30, 347–364.

Peria, M.S., and Schmukler, S.L. (2001). Do depositors punish banks for bad behavior?. Journal of Finance, 56, 1029–1051.

Rosen, R.J. (2007). Banking market conditions and deposit interest rates. Journal of Banking and Finance, 31, 3862–3884.