Bulletin of Monetary Economics and Banking

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The implementation of the Law No 22 and 25 in 1999 has been recognized as starting point for Indonesia in pursuing a comprehensive and ambitious decentralization program. Decentralization in further step has changed many things including people’s perception especially on the role of regional banks. For some extend the existing regional banks have been claimed as the main cause for “capital flight” from one region to other regions. LDR is used as the only one parameter for claiming that regional banks do not play its role as the intermediary institution and caused the “capital flight”.This paper, derived from the study of the effectiveness of regional banking conducted by PPSK BI, addressed the issue how regional banking should be assessed and what factors affect its effectiveness as intermediary institution. One of the findings of this study is that LDR should not be used as the only one parameter for the effectiveness of regional banks intermediary function. To assess whether regional bank have played its role effectively or not, this study proposed 3 other parameters: RLCR, TLCR and R2. Another important finding of this study is that banking decentralization in term of changes from branch office banking into unit office banking will affect positively the intermediation function of regional bank.

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