Bank characteristics and monetary policy in Indonesia

Abstract

The uniqueness of credit in asset side of bank’s balance sheet is the main view of bank lending channel (BLC). One of BLC assumption is the supply shift of bank credit, which will shift if bank reacts to the monetary shock pursue by central bank. The objectives of this study are to test whether BI rate affects the supply of bank credit and to analyze the reaction of commercial banks to the change of BI rate based on the bank characteristics such as size, liquidity and capitalisation during 4Q2005:3Q2011. The results using System GMM proved that BI rate has a negative and significant effect on the supply of bank credit. The bank’s reaction to the change of BI rate depend on their size dan the degree of liquidity while capitalization does not significantly determine the reaction.