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Denny Irawan, Febrio Kacaribu
Abstract
The financial crisis of 2007/8 has revealed the importance of risk, besides credit, in the dynamics of financial cycle and business cycle in the economy. This study examines the relationship among those three cycles in the economy (Tri-Cycles), namely (i) business cycle risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance. We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle risk and its consequences to the bank performance. We use Indonesian data for the period from 2002q1 to 2014q4. We use unbalanced panel data of individual banks' balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by implementing PVAR package developed by Irawan. The results show dynamic relationship between business cycle risk and financial risk cycles. The study also observes the prominent role of risk cycles in driving bank performance. We also show the existence of ?financial accelerator phenomenon in Indonesian banking system, in which ?financial cycles precede the business cycle risk.
JEL Classi?cation: E320; G210; G310
Keywords: Business Cycle Risk — Credit Cycle — Bank Lending — Financial Risk
