CHAPTER II LITERATURE REVIEW

Transcription

1 CHAPTER II LITERATURE REVIEW 2.1 Risk Concept Risk Definition Risk is the probability of occurrence of an event that will produce serious consequences. Every institution has risks. It cannot be rejected, avoided and eliminated, but mitigated. Risks can be mitigated by managed well to minimize it. Here are some definitions of risk. According to Oxford English Dictionary, it defines risk as The possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility. According to Joel Bessis (1999, risk is the adverse impact on probability of several distinct sources of uncertainty. To sum up, risk is the probability of the outcomes. The outcomes can be negative and positive impacts on objectives. In banking institution, commonly risk is related to negative outcomes. Risk management in banking is implemented in order to calculate the possibility of risk, the impact of risk, and make strategy to manage and mitigate risk. By knowing that, the institution can manage risks properly so that risk would not cause a great loss in the future Types of Risk Bank institution has inherent risk in their banking system. Failure of bank would give an impact in country s economy. Lack of understanding in bank risk management would occur big problem. There are many risks in banking institution, which are credit risk, liquidity risk, market risk, foreign exchange risk, interest risk, solvability risk, operating risk, capital at risk, fraud risk, and fiduciary risk. Risk in banking institution is 5

2 multidimensional. The most crucial risk in banking is interest risk, liquidity risk, credit risk, and market risk. (Bessis, Joel, Liquidity Liquidity Definition Managing liquidity is an important issue for banking institution to maintain its business continuity. According to Joel Bessis (1999:7, Liquidity is the ability to provide funds to meet deposit withdrawals and loan demand as well as other obligations that have matured. According to Dahlan Siamat (2004:153, Liquidity is the ability of banks to collect certain amount of funds on a fee basis and within certain. Form some definition of liquidity above, liquidity can determined as the ability of banks to provide liquidity tools in order to fulfill all obligations immediately due form of customer deposits and lending to customers Liquidity Risk Liquidity risk is the probability of bank that cannot provide liquidity tools in order to fulfill all obligations immediately, in a form of customer deposits and lending to customers. To manage liquidity risk, bank management does the forecast of customer s demand of fund and provision of a sufficient amount of funds to meet those needs. Liquidity risk management is a complex issue in the bank s operations. The difficult of managing the funds is caused by the source of fund managed by bank, mostly from public are always fluctuate. Therefore, the bank must pay attention as accurate as possible to the needs of liquidity in specific period. Liquidity risk can be measure using liquidity ratio that related to performance of bank itself. In general, the ratios used to calculate liquidity risk are Loan to Deposit Ratio (LDR, Loan to Assets Ratio (LAR, and Cash ratio. Based on the previous research, indicated that it was not enough to measure liquidity just only using liquidity ratios. Banks should develop a new view of liquidity measurement. Different approach is being used to calculate liquidity risk in this research. BASEL III regulation that 6

3 published by Bank For International Settlements is used as a reference to determine liquidity risk. Basel III is a global regulatory standard that focusing on bank liquidity and bank leverage. Strong capital requirements are necessary condition to strong liquidity condition. There are two standard that comprised as specific parameters in BASEL III, Liquidity Coverage Ratio (LCR and Net Stable Funding Ratio (NSFR. LCR is focusing on short-term situation, meanwhile NSFR is focusing on long term. Both of this ratios is used to strengthen current monitoring tools and used as a comparison of liquidity condition between banks. LCR focus on sufficient high quality of liquid assets owned by bank to with stand 30-days stressed funding scenario. NSFR is long term structural ratio to address liquidity mismatches. This ratio establish minimum acceptable amount of stable funding based on liquidity characteristic in bank. Because NSFR is depends on the management of each banks, LCR is more preferable and easier to measure to determine liquidity risk in this research Liquidity Coverage Ratio Liquidity Coverage Ratio measure an adequate level of high-quality liquid assets that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors. The standard requires that the value of the ratio be no lower than 100% Banks are expected to meet this requirement continuously and hold a stock of unencumbered, high-quality liquid assets as a defense against the potential onset of severe liquidity stress. Given the uncertain timing of outflows and inflows, banks and supervisors are also expected to be aware of any potential mismatches within the 30-day period and ensure that sufficient liquid assets are available to meet any cash flow gaps throughout the period. The formulation of Liquidity Coverage Ratio as follows;!"#$%!!"!!"#!!!"#$%&'!!"#$"%!!""#$!!"#$%!!"#!!"#!!!"#$%!!!!"#$!!"#!!"#$!!"!!"#$!!!""! 7

4 Based on adjustment to circular letter attachment No.6/23/DPNP about health rating system in liquidity factor, note the detail of LCR is described at Table 2.1. Table 2.1 Liquidity Coverage Ratio Formulations Stock of high quality liquid asset Cash Placement at Bank Indonesia Demand deposits at BI Certificate of BI Others Interbank Placements Net Cash Outflow Cash Inflow Net profit in current year Third Parties Fund Demand Deposits Saving Deposits Time Deposits Certificates of deposits in BI Deposits from other bank Borrowings Cash Outflow Net loss in current year Credit Extended (Loans 2.3 Bank Bank Definition Based on Act No.10 of 1998, the definition of banks is a business entity that collects funds from the public and mobilizes that funds to the public again in the form of credit and/or other forms in order to improve the living standards of a large population. Based on Financial Accounting Standard (PSAK No. 31 (1999:31.1, Bank is an institution that acts as an intermediary between the parties that have excess funds and those that need funding, as well as the institutions that serve to facilitate traffic payments. Bank, as a financial intermediary between two parties, excess funds (surplus units and those who lack of funds (deficit units, serves as a collector of funds, channeling funds, and providing other banking services. Bank is one of the institutions that hold important roles of the country s economical growth. The banking industry is a crucial institution 8

5 because most of people put thee money in bank by a safety reason. This institution has to be regulated properly in order to protect customer s funds and also increase trust Bank Types According to Bank of Indonesia regulation, banking institution is classified into four types based on its function; Bank Central, Commercial Bank, Rural Bank (Bank Perkreditan Rakyat, and Sharia Bank (Bank Syariah Bank Central The Central Bank is the institution that is responsible to control banks condition that operates in Indonesia and maintaining price stability, known as inflation. Bank Indonesia is the central bank in Indonesia. Referring to act no. 23 of 1999, Bank Central, as an independent state institution, has three main focuses of task. First, formulate and implement monetary policy, regulate and maintain payment system, and the last is regulate and supervise banks Commercial Bank Commercial bank is a bank conducting conventional business activities that providing services in payment traffic. The main function of commercial banks is becoming a collector and distributor of public funds and service providers in the payment traffic. Commercial banks also have a strategic role in aligning and balancing economic growth to support implementation of national development. Commercial banks is classified into six sectors consist of State Owned Bank (BUMN, Foreign Exchange Bank (BUSN Devisa, Non-Foreign Exchange Bank (BUSN Non-Devisa, Regional Bank (BPD, Joint-Venture Bank, and Foreign Bank. According to bank transactions, banks divided into Non-Foreign Exchange Bank and Foreign Exchange Bank. Foreign Exchange Bank is a bank that can make international transactions such as export and import, sale and purchase of foreign exchange, etc.. While the Non Foreign Exchange Bank cannot conduct international transactions, or in other words can only do domestic transactions only. (Irmayanto,

6 Rural Bank (Bank Perkreditan Rakyat Rural bank is a bank conducting conventional business activities without providing services in payment traffic. Rural bank has restricted operational area compared to commercial bank. Rural banks are focusing their operational on lending capital to SME (UKM in a small scale. This type of banks has the lower minimum required capital rather than commercial banks Sharia Bank (Bank Syariah Sharia Bank, also known as Islamic banking is the bank that runs its business based on sharia principles. Islamic banking is divided into two types of bank, commercial Islamic Banks and Rural Islamic Banks Bank Instruments Activity in banking industry is shown in the balance sheet. It contain of liabilities as a source of funds and assets as allocation of funds. Here is a brief concept of bank s balance sheet. Table 2.2 Balance Sheet of Commercial Bank Assets Cash Reserves Cash items in process of collection + Deposits at other banks Securities U.S. Government and agency State and local government Other securities Loans Commercial and industrial Real Estate Consumer Interbank Other Loans Other Assets Total Liabilities Checkable deposits Nontransactional deposits Saving deposits Small denomination time deposits Large denomination time deposits Borrowings Fed-fund (interbank market Bank holding company (parent company Repurchase agreement (repos Eurodollar Discount loan Bank capital (total asset-total liabilities, loan loss reserves Total Source: Mishkin, F.S., and S.G. Eakins

7 Referring to the table above and by adjusting the balance sheet of banking industries operates in Indonesia, possible instruments that affect liquidity risk can be determine Cash Cash is cash and other payment instruments, in form of rupiah and foreign currency, which is still valid as legal tender used to finance the company's operations. (Djarwanto, Ps. 1996: 37. Cash is highly liquid assets owned by banks and do not generate revenue so it needs to be controlled so as not to cause the amount of idle funds Reserves (Placement in Bank Indonesia Placements in Bank Indonesia are categorized into three types, including Current accounts in Bank Indonesia, certificates of Bank Indonesia, and others. Current account in Bank Indonesia is the bank account balance in form of rupiah and foreign currency at Bank Indonesia. Current account at BI is one of the liquids used for crediting and debiting the inter-bank clearing. There is a requirement of amount of Current accounts at BI that set by Bank Indonesia in the form of reserve requirement (GWM. Regulation No. 10/19/2008, issued on October , states that compliance with reserve account amount to 7.5% which consists of the main reserve of 5% and 2.5% secondary reserve requirement of total rupiah deposits, while the fulfillment of reserve requirement for foreign currency accounts to 1% of total deposits in the eye foreign currency. A certificate of Bank Indonesia (SBI is securities issued in rupiah with the discount system by Bank Indonesia in recognition of his debt. The banking industries prefer to allocate their funds into the Certificates of Bank Indonesia (SBI because of high interest rates. Bank Indonesia Certificates (SBI is the most liquid securities that can be used at any time without causing loss of cash in the bank owns it Securities According to Decree No. 31/147/KEP/DIR, Securities are debt admission letters, notes, bonds, credit securities, or any derivative thereof, or other interest, or an 11

8 obligation of the issuer, in the form commonly traded in capital markets and money markets. The types of securities including the Bank Indonesia Certificate (SBI, Money Market Securities (gas stations, Securities Commercial (Commercial Papers, Certificate of Mutual Funds and Medium Term Notes Loans Definition of loan based on Banking Act No. 10 / 1998 is The provision of funds or related claims based on an agreement or contract to borrow/loan funds between banks and another party that obliges the borrower to pay off his/her debt according to a designated schedule and interest charges, including the purchase of Money Instruments by clients complete with a Note Purchase Agreement (NPA and the transfer of claims involved in factoring activities. Loan is a major component asset for commercial banks. The classifications of loan based on the use of credit are general working capital loans, investment loans, consumer loans, credit guarantees, and others. (Supriyono, Maryanto, Loans have a low liquidity compared to other asset, because the funds can be disbursed only when credit is due. In addition to providing benefits, credit also contains a high default risk Current Account Current account is the third-party deposits in form of rupiah and foreign currency, the withdrawal can be made at any time by check, warrant payment (SPPL or by book transfer. Current accounts commonly used by manufacturers or merchants to conduct transactions. These funding sources can be categorized as a highly volatile source of funding and has no maturity date. However, this funding source is the least expensive source of funds for banks. Interest rate given for Current account is still lower than the interest of time deposit and savings deposits Saving Deposits Savings deposit is the third-party deposit at banks that withdrawal can only be done according to certain agreed conditions. These deposits cannot be withdrawn by check or other equivalent means it. The objective of type of savings is the individual customer. The role of savings deposit in the composition of funding sources is relatively small 12

9 because the costs are quite high. But the fluctuation of savings is relatively more stable than the deposition of funds accounts Time Deposits Time deposits is a third-party deposits in bank that withdrawal can only be done within a specified period by agreement between the depositor with the bank. Time deposits have the highest cost than other deposits. This type of deposit is the most stable compared to other deposits. The interest rate becomes the main attraction for customers to save their funds in a form of time deposit. High and low interest rates depending on the deposit period. There are three types of deposits, including time deposits, certificates of deposit, and deposits on call Capital Based on the Board of Directors of Bank Indonesia Decree No. 23/67/KEP/DIR dated February 28, 1991 the bank's capital is divided into two parts, of which core capital and supplementary capital. Core capital consists of paid-up capital, disclosed reserves, and innovative capital instrument (PBI No.10/15/PBI As mentioned in article 7, the availability of core capital is to absorb losses that occur before or during liquidation. If the bank is facing crisis of liquidation, the available of core capital can be used to overcome the crisis. 2.4 Previous Research Liquidity Coverage Ratio is new ratio that used to measure liquidity risk. Based on finding, there are no previous researches that used LCR as the ratio that represent liquidity risk. Most of researches use Loan to Deposit Ratio (LDR as a ratio that represents liquidity risk. These are some findings related to this research. 13

10 Table 2.3 Summary of Previous Research No. Researcher Title Result 1. Seandy Nandadipa Analisis Pengaruh Car, Npl, Inflasi, Pertumbuhan Dpk, Dan Exchange Rate Terhadap Ldr CAR, NPL, Inflation, and Exchange Rate have negative impact to LDR. Third parties growth has positive impact but not significant to LDR. 2. I Wayan Sudirman (2003 Faktor-Faktor Penghambat Peningkatan Loan to Deposit Ratio Perbankan di Propinsi Bali Interest rate of demand deposit, savings in another bank, and deposits have significant effect towards LDR. 3. Pavla Vodova Determinants of Commercial Bank s Liquidity in Slovakia Liquidity increases with the growth of gross domestic product. Borrowers reduce their debt during expansionary phases and increase the demand for loans in recessions. It became the reason why banks tend to lend more (and thus decrease their liquidity. Interest rates (on loans, on interbank transaction and monetary policy interest rates, interest rate margin, the share of non-performing loans and the rate of inflation have no statistically significant effect on the liquidity of Slovak commercial banks. 4. Dwi Andika Pengaruh Simpanan Total deposits, loans, and fixed 14

11 Ramadianti Masyarakat, Jumlah Pinjaman Yang Diberikan, Dan Investasi Pada Aktiva Tetap Terhadap Likuiditas Bank Umum Yang Go Public Di BEJ Period assets have significant effect to LDR. Credit has a dominant influence on LDR compared to other variables. 5. Iman Pirman Hidayat, Hana Hujaemah Pengaruh Pemberian Kredit Terhadap Loan To Deposit Ratio Dan Dampaknya Pada Pendapatan Bunga Bank Loan has no significant effect to LDR. 2.5 Research Framework Based on the problem identification that has been described in Chapter 1, conceptual framework for this research is as follow: Current account (X 1 Saving Deposit (X 2 Time Deposit (X 3 Loans (X 4 Liquidity Coverage Ratio (Y Cash (X 5 Reserves (X 6 Securities (X 7 Capital (X 8 Figure 2.1 Research Frameworks 15

12 2.6 Hypotheses Hypotheses are provisional estimates from the research that will be examined in this study. The author propose the following hypothesis: H1: Current account has negative impact to liquidity coverage ratio Current accounts are third parties fund that very volatile. Therefore, bank management prefers to save this fund and do not use it in the form of loans to avoid risks. Growth of current account indicates that banks have to provide adequate fund to cover the withdrawal. Therefore, the author assume that the growth of Current accounts affect the liquidity coverage ratio. H2: Saving deposit has negative impact to liquidity coverage ratio Growth in the number of saving bank deposits owned by banks has affected liquidity coverage ratio. The more saving deposits owned by bank, the more amount of fund must be available to meet the withdrawals made by customer. Saving deposit also volatile. That characteristic of fund made bank management does not use it to operational activity to generate profit. Therefore, saving deposits have a negative impact on liquidity coverage ratio. H3: Time deposit has positive impact to liquidity coverage ratio The number of time deposit bank-owned has an effect on liquidity risk. Time deposit has a clear withdrawal period based on the type of time deposit itself. It brings an advantage for the bank to utilize the fund whether to generate profit or to meet the obligation of banks itself. Sudden withdrawals by customers rarely happened. Because based on market analysis, customer put their fund in this type of deposit is to generate profit and the fund put in this deposit commonly not an emergency fund. They allocate the fund purely to invest. So, if they withdraw the fund before the contract, they would incur losses. Therefore, the time deposits have a positive impact on liquidity coverage ratio. H4: Loan has negative impact to liquidity coverage ratio Growth of loans owned by banks has an influence on liquidity risk. The more loans issued by banks, the greater the likelihood of default will be experienced by the bank. This will cause great losses. Loan funds that fail paid by the client will reduce the 16

13 availability of liquid funds. Therefore, the loan has a negative impact on liquidity coverage ratio. H5: Cash has positive impact to liquidity coverage ratio The sufficient amount of cash indicates that the availability of liquid funds owned banks. With an adequate amount of cash, liquidity risk can be mitigated. That way, cash has a positive impact on liquidity coverage ratio. H6: Reserves has positive impact to liquidity coverage ratio Reserves growth in bank indicates that the availability of liquid funds owned by banks in good condition. By fulfilling reserve requirement set by central bank, the bank considered safe from the liquidity risk. In case of sudden need for funds, the bank can easily liquate the reserves to meet obligations. That way, the reserves have a positive impact on liquidity coverage ratio. H7: Securities has positive impact to liquidity coverage ratio The growth of bank-owned securities indicates that the availability of liquid funds owned banks in good portion. By sufficient number of securities, banks can mitigate liquidity risk. Banks can sell the securities are held to meet the obligations. But this instrument is less profitable because the price of securities tends to fluctuate. It would cause a loss if it sold unexpectedly. That way, the securities have a positive impact on liquidity coverage ratio. H8: Capital has positive impact to liquidity coverage ratio The number of bank-owned capital is used as a reserve to absorb losses occurs before or during that liquidation. The growth of bank-owned capital will affect the liquidity risk. That way, the capital has a positive impact on liquidity coverage ratio. 17