Depositor Response to Risk of Local Development Banks: A Case of Indonesia

Erie Febrian


There have been some studies carried out to empirically show how depositor respond the magnitude of risk in various types of banks, in different economies. Some studies have also checked the issue when banks are protected by Deposit Insurance. Nevertheless, the aforementioned studies have never adequately covered the issue on local development banks. These financial institutions may not fulfill the necessary conditions of effective Discipline of the market, due to a high degree back up provided by the associated local government. This article is to cover the literature gap, i.e., by studying how depositors reply to risk magnitude of local development banks (known as BPD) in Indonesia. This research employs monthly data of ten BPDs with the largest asset operational in Indonesia, which is attained from the country’s Authority of Financial Service. We run analysis employing Reduced Form Formula. In this approach, the first model is to measure the risk of each bank employing Probit formula and data from 2014.1 to 2015.12. The results of this model are then employed as  exogenouselement in the second phase model, Multiple Regression Formula. The second model utilizes data from 2016.1 to 2017.3 to show the response of bank customers to the risk of the observed financial institutions. 


Market Discipline; Deposit Insurance; Local Development Bank

Full Text:



Ahumada C., Antonio, and Carlos Budnevich L. 2001. “Some Measures of Financial Fragility in the Chilean Banking System: An Early Warning Indicators Application.” Central Bank of Chile Working Papers 117.

Demirguc-Kunt, A., and E. Detregiache. 1998a. “The Determinants of Banking Crisis: Evidence from Developing and Developed Economies”. International Monetary Bank, Staff Papers, 45: 81-109

Demirguc-Kunt, A., and E. Detregiache. 1998b. “Financial Liberalization and Financial Fragility”. International Monetary Bank, Working Papers, WP/98/81

Demirguc-Kunt, A., and E. Detregiache. 2000a. “Does Deposit Insurance Increase Banking System Stability?”. IMF Working Paper 00/01

Demirguc-Kunt, A., and E. Detregiache. 2002. “Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation”. Journal of Monetary Economics 49:1373-1406

Demsetz, Rebecca S., and Philip E. Strahan. 1995. "Historical Patterns and Recent Changes in the Relationship between Bank Holding Company Size and Risk." Federal Reserve Bank of New York Economic Policy Review 2: 13-26.

Diamond, D., and P. Dybvig. 1983. “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy 91: 401-419.

England, Catherine. 1991. "Judging the 1991 Reform Effort: Do U.S. Banks Have a Future?" Cato Institute Policy Analysis 149: 1-26.

Febrian, Erie and Herwany, Aldrin. 2011. ”Depositor Sensitivity to Risk of Islamic and Conventional Banks: Evidence from Indonesia”. The International Journal of Business and Finance Research, Vol. 5. No. 3, pp 29-44.

Grossman, Richard S. 1992. "Deposit Insurance Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930s." American Economic Review 82: 800-821.

Honohan, P. 1997. Banking System Failures in Developing and Transition Economies: Diagnosis and Prediction. BIS Working Paper Series no.39.

Hosono, Kaoru. 2005. “Discipline of market To Banks In Indonesia, The Republic Of Korea, Malaysia And Thailand”. Proceeding ADBI Conference 20-21 January 2005.

Khorassani, Jacqueline. 2000. “An Empirical Study of Depositor Sensitivity to Bank Risk”. Journal of Economics & Finance 24:15-27.

Merton, Robert C. 1977. "An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees." Journal of Banking and Finance 1:3-11.

Park, S. 1995. "Discipline of market By Depositors: Evidence From Reduced-Form Formula", The Quarterly Review of Economics and Finance, 35 497-514.

Thies, Clifford F., and Daniel A. Gerlowski. 1989. "Deposit Insurance: A History of Failure." Cato Journal 8: 677-693.

Wheelock, David C. 1992. "Deposit Insurance and Bank problems: New Evidence from the 1920s." Economic Inquiry 30: 530-543.

Wheelock, David C, and Subal C. Kumbhakar. 1994."'The Slack Banker Dances:' Deposit Insurance and Risk Taking in the Banking Collapse of the 1920s." Exploration in Economic History 31: 357-375.



  • There are currently no refbacks.

Copyright (c) 2017 Jurnal Bisnis dan Manajemen

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.