Optimal bank portfolio choice and bank regulation: The Indonesian case

This study tests empirically contracting theory in financial market. The model is based on Krasa and Villamil model (1992) which is modified to let each investor has k units of endowment, each bank has equity B, and monitoring cost depends on project size. In this model loan size per entrepreneur and the number of loans become choice variables (this makes the intermediary able to economize monitoring cost by investing more in one project). The modification allows us to determine the optimal bank size, the effect of a bank's assets on its return, and the effect of a bank's capital adequacy ratio on its asset portfolio and returns. The model is calibrated using Indonesian data, because there is no deposit insurance and banks are not restricted to branch. Thus, it is expected that the market distortion observed will not be significant. The result of the study is interesting, because the model can explain why many banks exist, predict real deposit rates and interest rate spreads. This research also finds that in general, a bank's size does not influence bank's return on equity. Finally, we can analyze the government policy to limit the bank's exposure to a single borrower or connected parties in Indonesia using the calibration result.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2011

Author dc:creator

• Adiningsih, Sri

• Economics, General
• Economics, Finance
• Business Administration, Banking

Statement dc:rights

• Copyright 1996 Adiningsih, Sri

Language dc:language

eng

Identifier

9780591197259
AAI9712184
(UMI)AAI9712184

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/20536