Empirical essays on indonesian banking : crisis and institutional reforms.

Summary In the first chapter of this thesis, using data from Indonesian banks, we examine the impact of a bank's political connections on its ability to collect deposits under different deposit insurance schemes. We find that regardless of the type of bank (private bank or state-owned bank), politically connected banks attract deposits more easily. We also show that this effect is more pronounced after the implementation of the limited coverage deposit insurance scheme. In Chapter 2, we analyze the determinants of Indonesian banks' net interest margin after the 1997/1998 financial crisis. Our results provide evidence that the structure of loan portfolios matters in determining interest margins. Operating costs, market power, risk aversion, and liquidity risk all have a positive impact on interest margins. Credit risk and the cost-to-revenue ratio are negatively associated with margins. Our results reaffirm the loss leader hypothesis on cross-subsidization between traditional intermediation and service activities. Public banks set higher interest margins than other banks, while margins are lower for large and foreign banks. In chapter 3, we examine the determinants of financial sector deepening for Indonesia's regions following institutional reforms that are leading the country to become more decentralized. We find that poor local governance significantly limits financial deepening. Our results suggest that in the least socioeconomically developed regions, the level of financial deepening is lower than in more developed regions.