Bulletin of Monetary Economics and Banking

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This paper studies the risk taking behavior of Indonesian Banking Industry, especially before and after the establishment and the implementation of Deposit Insurance Corporation (IDIC). Using common set of explanatory variables; we test several empirical models to reveal the conduct of risk management by banks. In the spirit of BASEL II Accord, this paper take closer look at three types of risk behaviors namely credit risk, market or interest rate risk and operational risk, prior and post the establishment of IDIC. We tested the hypotheses using panel data set of banks operational in period of 2000-2009. The dataset consists of 121 banks with semiannual frequency (2420 observations). Our findings show that these variables explain well the three type bank risk exposures. The implementation of IDIC alters the bank behavior albeit in somewhat different way than initially hypothesized. The risk taking responses also varies across bank types. We found that State Owned Enterprise banks (SOE) behave differently relative to the rest types of the bank. Related to size, SOE banks behave more conservative after the implementation of IDIC. On the other hand its response on conditioned capital post the IDIC implementation is the opposite; they became more aggressive. We view the public pressure on this state banks has influenced the way they manage the risk.

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