Riyanto, Wahyu Pramono and Nurani Pertiwi

Executive Summary

The instability of the banking system has a big impact, both micro and macro and requires high rescue costs. Based on previous experience, a financial crisis will lead to further crises which ultimately weaken a country's economy as a whole and even spread to the economies of other countries, such as what happened in the Asian financial crisis in 1997/1998 and the global financial crisis in 2008/2009. Therefore, early detection of the risk of a banking crisis is very important. This study aims to develop banking risk indicators that reflect the condition of banking vulnerability and find variables that can be leading indicators for banking vulnerability in Indonesia to assist efforts to stabilize the banking system and provide early warning of banking system vulnerabilities. The results of this study show that (1) the banking vulnerability index that was formed can properly describe the vulnerability of Indonesian banks during 2000-2014; (2) using the business cycle method, it is found that the variables that can be leading indicators of banking vulnerability are the trade balance per GDP, consumer price index (CPI), world oil prices, Chinese imports, and the Chinese stock market with an average lag of average 5 months; (3) based on the Banking Vulnerability Leading Index, it is predicted that the condition of Indonesian banking in the second semester of 2014 to the beginning of 2015 will be in a fairly stable condition with very low credit risk, liquidity risk and market risk.