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Macroeconomic Stress Testing for Indonesian Banking System

Muliaman D. Hadad1, Wimboh Santoso2, Bagus Santoso3, Dwityapoetra S. Besar4, Ita Rulina5

Abstract The aim of this paper is to perform macro stress test (top down approach) for Indonesian banking system using banks monthly data from December 1996 until May 2005. We compare the behavior of big banks (15 banks) and small banks (116 banks) by using univariate and multivariate approach. The variables are banks Loan Loss Provisions, GDP, Inflation, growth of Money, SBIs rate, foreign exchange, gasoline prices, diesel fuel prices6. We employed pooled least square fixed effects technique. The result of the univariate regressions show that the price stability indicators, i.e. the growth of money and the inflation, play great role in large credit risk behavior. In most regressions, those variables have significant long-run impact on the proxies of credit risk used. In addition, the rise of Premium price and Solar price have large long-run impact on some dependent variables which reflect credit risk. Overall, the result of the multivariate regression suggests the importance of price stability in order to maintain financial stability in term of credit quality. Keywords : Banks, Macroeconomic, Business Fluctuations and Cycles JEL Classification: G21, C32

Director of Directorate for Banking Research and Regulation, Bank Indonesia; muliaman@bi.go.id 2 Executive Bank Researcher at Financial System Stability Bureau Directorate for Banking Research and Regulation, Bank Indonesia ; e-mail address : wimboh@bi.go.id 3 Researcher at Gajah Mada University; bagussantoso@ugm.ac.id 4 Senior Bank Researcher at Financial System Stability Bureau Directorate for Banking Research and Regulation, Bank Indonesia; dwityapoetra@bi.go.id 5 Bank Researcher at Financial System Stability Bureau Directorate for Banking Research and Regulation, Bank Indonesia ; email address: rulina@bi.go.id 6 Government differentiates the oil prices into two separate prices namely: gasoline price and diesel fuel price.
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1. Background The linkage between the financial system and the business cycle has been the subject of a lot of study. It is important for central bankers to understand how banks are affected by the development of business cycle. During the downturn of economy, consumers profitability is going down and will deteriorate banks loan quality, then, often causing losses in banks balance sheets. In addition, the bad economy condition usually accompanied by the rise of unemployment will reduce households income and their repayment capacity. To overcome the risks, bank creates larger provisions and higher levels of capital, just when it is hard to have one. Sometimes, banks may respond by reducing lending, particularly if their capital is in critical point. This will worsen the economic downturn (procyclical). Berger and Udell (2003) mentioned that the Ideas of procyclicality of financial system is procyclical are quite consistent with economic events, such as credit crunch in the US during the early 1990s, Asian crisis in the late 1990s and the large corporate bankruptcies in the early 2000s. Many theories focus on the increase and decrease in the supply of bank credit over the business cycle in order to explain two stylized facts widely observed by regulators, practitioners and researchers. First, lending often increases significantly during business cycle expansions and then falls significantly during subsequent downturns, sometimes dramatically enough to be labeled a credit crunch. These changes in lending are generally more than proportional to the changes in economic activity, suggesting that they are changes in bank loan supply that tend to highlight the business cycle. The second fact about bank loan procyclicality is that observed measures of loan performance problems appear to follow a distinct pattern over the business cycle. Past due, nonaccrual, provisions and charge-offs are generally very low during most of the expansion, start to appear at the end of the expansion, then rise dramatically during the downturn. This suggests that banks may take significantly more risks during the expansion, but these risks are revealed only later because it takes time for loan performance problems to appear (Berger and Udell, 2003). The analysis of banking sector is a central component of financial stability monitoring since it is still a key of financial stability as a whole. The banking crisis in several emerging countries in the late of 1990s has proven costly. Empirical studies show that the costs of crisis in developing countries, on average, reached 15-20 percent of GDP annually, for example Hoggarth and Saporta (2001). Costs of banking crisis were generally higher in case of a simultaneous currency crisis (Mrttinen et al., 2005). In Indonesia, the cost of banking crisis in 1997 was 51% of GDP. In response to the increases financial instability in many countries in the 1990s, central bankers have become interested in better understanding the vulnerabilities in financial systems and measures that could help prevent financial crises. One of the key techniques for quantifying the linkage between
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macroeconomic and financial sector is stress testing. Stress tests are generally a risk management tool banks use to determine how the value of their portfolio would change in the event of unexpected crisis. Stress test may produce useful result not only for individual banks. Central banks who maintain financial system are challenge with the questions to what level a certain unexpected scenario would affect financial system and the banking system as a whole. Macro stress test will explore what implications general macroeconomic crisis scenario such as oil shocks would have for the financial system. The following macro stress test for the Indonesian banking sector, which is using banks individual loan loss data, draws on the approach outlined in Banks Performance Over the Business Cycle: A Panel Analysis on Italian Intermediaries, by Mario Quagliariello (2004). The best way to approach this is probably to start by simply replicating what they have done for Indonesia. To comprehend Indonesian condition, we employ other macro variables influencing most banks in Indonesia. The purpose of this paper is to perform macro stress test for Indonesian banking system using banks monthly data from December 1996 until May 2005. We compare the behavior of big banks (15 banks) and small banks (116) by using univariate and multivariate approach. This paper is structured as follows: section 2 provides literature study on macro stress testing. The methodology underlying stress test and data analysis are presented in section 3. Section 4 explains the simulation and stress testing procedures and the result. Finally, section 5 provides a summary. 2. Literature Studies Stress tests are increasingly used by the supervisory authorities to assess the resilience of the financial system to adverse macroeconomic disturbances, thus enhancing their action. Kupiec (1998) points out that a common practice to compute stress exposure measures may be imperfect. He thought that the commonly computed stress exposure measures, based on the variance-covariance approach for calculating VaR, are usually obtained by setting to zero the changes on the "remaining" risk factors. Basically, stress tests are aimed to complement the internal model approach, i.e. Value at Risk (VaR), which is fairly well-known. Guy et al. (1999) shows the fact in addition to VaR calculation, stress tests should be used to measure the risk of financial transactions. The exact definition of stress test is surprisingly unclear. Berkowitz (1999) cites several definition, for example 1999 BIS document, Framework for Supervising Information about Derivatives and Trading Activities, which says that stress scenarios need to cover a range of factors that can create extraordinary losses or gains in trading portfolios and that they should provide insights into the impact of such event on positions. Despite the lack of formal definition, Berkowitz (1999) suggests that stress test means choosing scenario that are costly and rare, and then putting them to a valuation model.

Other researchers, Fender et al (2001), argue that stress test then is considered complements firms other risk management tool, particularly VaR. It has limited ability to capture the risks of exceptional market events, especially those in which asset prices move in ways that differ sharply from historical norms. VaR calculation should be combined with stress tests because a VaR model does not shed light on the dimension of heavy losses and somewhat skeptical attitude towards the assumption on which most VaR calculations are based. Oesterreichische Nationalbank (2001), stated that stress tests are not based on statistical assumptions on how the changes in risk factors are distributed. Therefore, the results of stress tests are not distorted by fat tails. Additionally, Blaschke et al. (2001) define the term stress test as a range of techniques used to assess the vulnerability of a portfolio to major changes in the macroeconomic environment or to exceptional, but plausible events. Bank for International Settlement (2000) identifies stress test as the examination of the potential effects on a firms financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events. The concept of stress testing is generally considered a way to identify scenarios that could cause significant loss, outside regular market events (Kuo, et al., 2002). This test is valuable in assessing the stability of banking system (Deutsche Bundesbank, 2003). On a broader view, stress testing the vulnerability of financial institutions to adverse macroeconomic events is an important tool in assessing financial stability (Hoggarth et al., 2003). Some historical events with particular relevance to bank and security firm portfolios are Black Monday (1987), the Asian financial crisis (1997) and Russian default (1998). The terrorist attack in the United States (2001) has also formed the basis for many historical and hypothetical scenarios. The International Monetary Fund (IMF) and the World Bank consider put stress test as an important component of their Financial Sector Assessment Program (FSAP). Stress tests carried out in the context of the FSAP aim to assess key risks and vulnerabilities arising from macro-financial linkages by assessing the impact of exceptional but plausible shocks to key macroeconomic variables on the soundness of the financial system (IMF and World Bank, 2003). Moreover, Bank regulators consider stress tests to be an effective and necessary tool that complements statistical model for quantifying and monitoring risk, for instance Basle Committee on Banking Supervision and EU Directive (Oesterreichische Nationalbank, 2001). Basle Committee on Banking Supervision (1995) notes that stress testing to identify events or influences that could greatly impact banks is a key component of a banks assessment of its capital position. Therefore, banks that use internal model approaches for meeting market risk capital requirement must have in place a rigorous and comprehensive stress testing program. The Basel Committee underlined the need for stress testing when it published the Amendment to the Capital Accord to Incorporate Market Risks in 1996; banking supervisors have then established the use of stress tests as an important component of the intermediaries internal-models approach to market risk monitoring (IAIS, 2003).
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Essentially, there are two major goals of stress testing. First, is to evaluate the capacity of the banks capital to absorb potential large losses and second, is to identify steps the bank can take to reduce its risk and conserve capital (Berkowitz, 1999). Therefore, during the past few years stress tests have become more important as a part of banks risk management. Top Down vs Bottom Up In principle, two solutions are available for the aggregation rule: supervisors can define the macroeconomic shock, let the intermediaries evaluate its impact on their balance sheets and then aggregate the bank-level outcomes to get the overall effect (bottom-up approach) or, conversely, they can directly apply the shock to some sort of banking system-level portfolio and analyze the aggregate effect (topdown approach). Of course, in the bottom-up methodology, the issue of comparability is a relevant one since each intermediary may employ different methodologies and modeling assumptions, making the aggregation less reliable. Conversely, the top-down approach enhances the comparability of the results, but it is typically based on historical relations (IAIS, 2003). The bottom-up approach is suited mainly to the field of market risk as many banks possess comparable market risk models. In the field of credit risk and in the case of macro stress tests, the heterogeneity of the models means that a topdown tends to be called for (Deutsche Bundesbank, 2003). Hoggarth et al. (2003) applies both bottom-up and top-down approach in macro stress testing of United Kingdom banks. Four scenarios are constructed based on domestic and global events, and shift in the demand for and supply of goods and services in the economy. The bottom-up result shows that in overall, the impacts those events were quite small in all scenarios. The top-down simulation was conducted using single equation econometric model, in which the effects of key macroeconomic and bank-specific variables on the provision made against aggregate credit losses by major UK-owned commercial banks was estimated. These simulations suggest that the likely increases in credit losses arising under all scenarios are quite small. The results tend to be sensitive to the nature and specification of the macroeconomic stress tests. The size of shocks is based largely on historical experience averaged over normal times and period of stress, rather than taken from stress period alone. Types of Stress Test Stress test involved one or more of the following types of analysis 1. Sensitivity test Sensitivity test estimates the impact of one or more moves in a particular risk factor on the financial condition such as exchange rates, economic growth and interest rates (IAIS, 2003). It is also called univariate stress test. In sensitivity

test, only a single risk factor was changed. In this case, it is assumed that there is no correlation between the risk factors (Deutsche Bundesbank, 2003). The advantage of this test is that it can isolate the specific influence of individual risk factors from that of other factors. Based on this test, credit institutions can identify the weakneses of their portfolio structure relatively accurately. The drawback, however, is that it ignores the interaction of various risk factors (Deutsche Bundesbank, 2004). Therefore there should be multivariate stress-test or scenario analysis as a supplement, in which more than one risk factor is changed at one time (Deutsche Bundesbank, 2003). 2. Scenario Analysis Scenario analysis is more comprehensive test. It includes simultaneous moves in a number of risk factors and is often linked to explicit changes in the view of the world. There are two basic types of scenario analysis; historical and hypothetical scenario. Historical scenarios reflect changes in risk factors that occurred in specific historical episodes. Hypothetical scenarios use a structure of shocks that is thought to be plausible, but has not yet occurred (IAIS, 2003). Historical scenarios is the most intuitive approach despite that it is backward looking and may lose relevance over time as markets and institutional structures change (Blaschke et al., 2001). BIS (2000) discusses two advantages and disadvantages of historical scenario. The advantages are its transparency and that the structure of market factor changes is historical rather than arbitrary. Regarding the disadvantages, the firms may structure their risk-taking to avoid losing money on shocks that have occurred in the past, rather than anticipating future risk that do not have a precise historical parallel. It may also be difficult to apply to products which do not exist at the time of the historical event being discussed or to risk factors whose behavior has changed significantly since that event. Regrettably, the number of usable historical scenario is limited because they are rare by definition and it is difficult to obtain reliable data for many instruments further back than just a few years. If historical event is included in a stress test, the start and end date for the scenario must be specified. However, even Basle Committee on Banking Supervision did not state which date to use for their prescribed scenarios (Schachter, 1998). Hypothetical scenario is a forward looking one. It can allow a more flexible formulation of potential events, as well as encouraging risk manager to be more forward looking. The main disadvantage of this approach is the difficulty to determine the likelihood of an event occurring since it is beyond the range of expectation (Blaschke et al., 2001). It is important to determine whether the exercise should be based on historical scenarios, assuming that past shocks may happen again, or rather on hypothetical scenarios, that is on extreme but plausible changes in the

external environment regardless of the historical experience (Blaschke et al., 2001; Hoggarth et al., 2004). Simply combining then univariate scenario is impractical since in most cases they provide very unrealistic results. Therefore, historical risk factor conditions that have actually occurred are often used despite historical simulation severely restricts the choice of possible scenario (Deutsche Bundesbank, 2003). Basle Committee on Banking Supervision (1996) also requires the construction of stress scenarios on the basis of historical crisis. These scenarios could include testing the current portfolio against past periods of significant disturbance. 3. Maximum Loss Approach or Worst-Case Scenario Basle Committee on Banking Supervision (1996) also requires banks to carry out stress tests using scenarios which they regard as potential problem situations, irrespective of whether or not these situations have occurred in the past. It means banks have to search for and apply worst-case scenario. In this approach, risk managers estimate the combination of market moves that would be most be damaging to portfolio (BIS, 2000). However, the potential future problems are not specified well. Basle paper describes that as the most adverse based on the characteristics of its portfolio (Oesterreichische Nationalbank, 2001). The worst-case scenario differs from historical scenarios. The construction of stress scenarios using historical data based on assumption that past crisis are similar to the future ones. Therefore, the recipients of stress test report cannot ignore the test result due to it has actually occurred. Past crisis constructed on the basis of historical maximum movements are not necessarily worst-case scenario. They may well be potential market movements which have not yet occurred, but which would result in worse consequences for the bank than the historical crisis which did occur. Neither are historical maximum movements necessarily worst-case scenarios, since certain scenario may suffer the greatest damage when risk factors move only slightly. In order to identify worst-case scenarios, all potential future scenario scenarios should be considered and not only events which occurred at some point in the past. Therefore, worst-case scenarios are also known as forward-looking scenario (Oesterreichische Nationalbank, 2001). In addition, historical scenarios pay little attention to the characteristics of the banks portfolio. On the contrary, the portfolio plays central role in defining worst-case scenarios. Basle Committee on Banking Supervision and Austrian Regulation offer two fundamental options to identify worst-case scenarios, i.e. subjective search for worst-case scenarios and systematic search for worst-case scenarios (Oesterreichische Nationalbank, 2001). In subjective search for worst-case scenarios, a bank may rely on the experience and economic expertise of staffs from as wide a range of field as possible, who use their knowledge of the market, of the portfolio and of the trading and hedging strategies of the bank in an attempt to identify market
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situation that could lead to high losses of the bank. On the other hand, in systematic search for worst-case scenarios, banks use their computers to systematically search for worst-case scenarios (Oesterreichische Nationalbank, 2001). 4. Extreme Value Theory This is the statistical theory concerned with the behaviour of the tails, i.e., the very high and low potential values) of a distribution of market returns. It is a better means to capture the risk of loss in extreme, but possible, circumstance. Due to focusing on the tail of a probability distribution, it can be more flexible. However, it produces a problem if it adapts to a situation where many risk factors drive the underlying return distribution. Furthermore, the usually unstated assumption that extreme events are not correlated over time is questionable (BIS, 2000). 5. Contagion analysis Contagion analysis seeks to assess the impact of transmitting from an individual financial institution to the rest of the financial system (IMF and World Bank, 2003). The values used by financial institutions for contagion effects are generally based on judgment and historical experiences rather than on formal models of market behaviour (BIS, 2000). Basle Committee on Banking Supervision (1996) requires that banks stress tests scenario should cover a range of factors that can create extraordinary losses or gains in trading portfolios. These factors include low-probability events in all major types of risk, including the various components of market, credit and operational risks (Oesterreichische Nationalbank, 2001). Basle Committee on Banking Supervision (2000) states that stress testing should involve identifying possible events or future changes in economic conditions that could have unfavourable effects on a banks credit exposures and assessing the banks ability to withstand such changes. Economic or industry downturns, market-risk events and liquidity conditions are three areas banks could usefully examine. The concept of stress test is relatively straightforward. However, the application of this technique in practice is more complicated (IAIS, 2003). Some of the difficulties are: determining what risk factors to stress establishing how such factors should be stressed establishing what range of values should be used determining the time horizon that such tests should consider meaningfully analyzing the results and making informed judgments. Regarding risk factors, there were two risk factors commonly employed in stress tests, i.e. credit and market risk. The credit risk refers to the risk that borrowers will not fulfill their payment obligations or not fulfill them on time (default risk). In a broader sense, it denotes the risk of deterioration in a borrowers

creditworthiness (Deutsche Bundesbank, 2004). Basle Committee on Banking Supervision (2000) simply defines credit risk as the potential that a bank borrower or counterpart will fail to meet its obligations in accordance with agreed terms. Market risk denotes the risk of a change in the market value of long or short position due to fluctuation in the underlying market prices. It comprises interest rate, equity price, commodity price, exchange rate and volatility risk (Deutsche Bundesbank, 2004). It is important to note that the choice of risk factors depends on the portfolio of banks due to not all portfolios are influenced by the same risk factors. However, the procedure for selecting risk factors is not clearly defined (Oesterreichische Nationalbank, 2001). The surveys conducted by Deutsche Bundesbank (2004) confirm that stress tests are employed mainly in the area of market risk, especially interest rate risk. On the other hand, only about 30% cases analyzed credit risk. Blaschke et al. (2001) discusses deeply the type of risks utilized in stress test. Univariate vs Multivariate Most of previous stress tests have involved single-factor sensitivity analysis based on historical extreme values. Growing number of researches have also applied scenario analysis. Gabon, Mexico and Sweden are among countries conduct FSAP IMF and World Bank, 2003). FSAP to Gabon was based on scenario analysis that focus to explore the linkages between macroeconomic developments and the financial sector by examining the effect on commercial banks solvency or liquidity of various types of risks. Contagion analysis was also applied to measure the risk stemming from a reduction in oil production by tracing its effect on the government's ability to service its debt (which is a function of oil income) and the corresponding impact on commercial banks income. Main findings of this test suggest that minimum regulatory solvency ratios were low in some institutions and relatively small shocks to macroeconomic variables could place individual institutions at risk. In addition, there was no indication of contagion risk across banks. The stress test in Mexico was conducted through scenario analysis performed by using Generalized Vector Auto-regression model to examine the impact of macro shocks on credit quality. The result of the test showed that slowdown in the U.S. economy and depreciation in the peso would have a large affect on the banking systems capital and profitability. Stress testing of the four major financial groups in Sweden indicated that they were robust to equity and real estate price shocks, as well as to shocks to exchange and interest rate shocks, and to a temporary economic slow down. The results of the tests were useful in identifying risk exposures of major banks. In 2001, a committee on the Global Financial System (CGFS) of the Central banks of the Group of the ten countries provides a comprehensive international survey
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on stress testing. The census revealed that banks place particular emphasis on stress-testing equity (see Bank for International Settlements, 2001). Quagliariello (2004) provides a comprehensive investigation on banks performance over the business cycle using an unbalance panel of 207 Italian intermediaries over the period 1985-2002. Quagliariello estimates both static and dynamic model in order to carry out simple stress test. The test aims to assess the effect of macroeconomic shocks on banks balance sheets. His study shows that banks loan loss provision, non performing loans, and return on assets are affected by the changes of general economic condition. Quagliariello also finds that several banks level indicators are also relevant in explaining the changes in the evolution of riskiness and profitability. This supports the idea that the overall performance of the intermediaries is the result of interaction between the general economic condition and banks management. 3. Methodology of Study Data This study uses monthly data over the period of December 1995 to May 2005. Initially we select 17 the biggest banks in Indonesia, based on their asset value. The next step we refine our sample by dropping all five foreign banks from our sample and add three more banks. The new set of sample consists of 15 large banks. Data for financial bank variables (NPL and LLP) are obtained from Bank Indonesia. Whereas data for macroeconomic variables are downloaded from IMF International Financial Statistic and Blomberg. Data for oil prices are from Pertamina. Model Specifications We employ linier regression model for panel data. We start with a General Unrestricted Panel Model (GUPM). Our GUPM is a varian of dynamic fixed effects model as follows
Yit = i + t + iYit j + i X it m + it
j =1 m =1 k n

(1)

where

Yit: Xit :
ai: it :

credit risks (LLP or NPL) macroeconomic variable i at time t individual effect from each bank residual, where eit~N(0, 2)

In order to estimate model (1), we employ general to spesific approach using PcGets. Here the GUPM is estimated by two strategies, first fixing i dan Yit-1 to exist at all the times and by setting =0. Second, we treat all variables can be
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candicate for reduction. We label the first approach as fixed approach and the second one as the flexible approach. As mentioned earlier, the dependent variable is the credit risk, and here we propose six variant of NPL and LLP, these are 1. LLP/TL = LLP/Total Loan 2. NPL/TL = NPL/Total Loan 3. D(LLP/TL) = (LLP/Total Loan) 4. D(NPL/TL) = (NPL/Total Loan) 5. G(LLP) = dlog (LLP) 6. G(LLP/TL) = dlog (LLP/Total Loan) Whereas the independent variables are macroeconomic variables in which from various literature reviews show correlation with credit risk. Here examines nine macroeconomic variables. These variables are grouped into five categories, i.e. cyclical indicator, price stability indicator, financial market indicator and central bank indicator. 1. Cyclical indicator Loan quality is sensitive to economic cycle therefore we include cyclical variable in our study. Kalirai and Scheicher (2002) provide the transmission link between economic activity and loan quality. Deterioration in economic activity leads to falling income and rising payment difficulties. Then, more business failures that will result in higher default risk. Therefore the cyclical variable, the growth of real (GDP), is expected to negatively related to credit risk. 2. Price Stability indicators As price stability indicators we include consumer price index inflation and money growth (M1 and M2. We included money growth since they have potential connection to inflation. High inflation forces borrowers to pay higher material prices then have less money to meet their obligations. The number of loans in actual default will rise therefore banks will increase their provisions7. 3. Financial Market Indicator

http://moneycentral.msn.com/content/P127636.asp

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We include Jakarta Stock Composite Index (Indeks Harga Saham Gabungan-IHSG) as the proxy for financial market indicator. It has similar pattern with the cyclical trend of economy. The high IHSG denotes the high returns for investor and hence lower the credit risk. IHSG is expected to have positive impact on credit risk. 4. External Indicators External indicators examined in this study are Rupiah exchange rate to US Dollar and domestic oil prices, i.e. Premium and Solar prices. The relationship between exchange rate and credit risk is ambiguous. It depends to the international trade and capital account of a country. Some of Indonesia borrowing is in foreign fund hence the depreciation of Rupiah lead to high credit risk since the debt repayment increase. The oil price hike is a negative demand shock to Indonesian economy. It raises household and business energy cost and cause deterioration in economy. Therefore, it produces greater credit risk. Based on the above rationalization, the depreciation of Rupiah and the increase of oil price are expected to positively related to credit risk. 5. Central Bank Indicators We examined the impact of the rise of Central Bank Bond (Sertifikat Bank Indonesia-SBI) one-month rate as the central bank indicator. Banks in Indonesia mainly refer to SBI rate in setting their interest rates. The higher SBI rate is usually followed by higher interest rate, which reflects higher cost of borrowing. This condition leads to higher loan default since firms and households face difficulties to service their debt. Therefore, the increase of SBI rate is expected to have positive impact on credit risk. These nine variables are transformed into first difference and to ensure stationarity of the series. 1. G(GDP): real GDP growth rate, measured as dlog(GDP) 2. G(PREMIUMDN) = rate of change of premium fuel price, measured as dlog(premium fuel price) 3. G(SOLARDN) = rate of change of diesel fuel price, measured as dlog(diesel fuel price) 4. G(M1) = rate of money growth of M1, measured as dlog(M1) 5. G(M2) = rate of money growth of M2, measured as dlog(M2)

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6. G(IHSG) = rate of growth of Jakarta Stock Composite Index (IHSG), , measured as dlog(IHSG) 7. INF = inflation rates, measured as dlog(CPI) 8. SBI = Central Bank bond rate (1 month SBI), measured in decimal 9. G(EXRATE) = rate of depreciation of rupiah, measured as dlog(Rupiah exchange rate, Rp/$) Procedures of Estimation In our procedure, the time series are assumed stationary since most of them are in the form of first difference. At the beginning, the group of banks analyzed consists of 17 banks, five of which are foreign banks. For this group, we only conduct stress test for two dependent variables, i.e. NPL/TL and G(LLP) and only for fixed effect model. Those five foreign banks are then eliminated and we include three domestic banks into the sample. For this new group, all six dependent variables are estimated. For each regression, we apply both fixed effect and flexible form of GUM. General-to-Specific Method is utilized in selecting the optimal lag for each regression. Here, the short-run and long-run coefficients of each variable are identified. In the next step, both univariate (sensitivity test) and multivariate (scenario analysis) regression are employed to estimate the impact of shock of macroeconomic variables on the credit risk of large banks in Indonesia. The longrun coefficient is then utilized in this scenario analysis. We refer to historical scenario rather than hypothetical scenarion to assess the impact of the largest shock experienced in the time series of those macroeconomic variables (Table 1). These historical scenarios are considered plausible enough due to they actually happened. Over parameterization becomes an issue in this analysis, especially due to the simultaneous inclusion of growth of M1 and growth of M2 in multivariate regression. We then also carry out multivariate regression for eight macroeconomic variables, in which only growth of M1 or growth of M2 is included.

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Loan Loas Provision and Non-Performing Loan as the Measures of Credit Risk Credit risk is still the main source of instability for most banks (Mrttinen et al., 2005). In this case, credits are the largest source of credit risk (Basle Committee on Banking Supervision, 2000). Therefore credit quality often becomes the dependent variable. Loan loss provision (LLP) and bad debts or non performing loans (NPL) are among measures of credit quality. LLP and NPL have been generally considered the transmission channels of the macroeconomic shocks to banks balance sheets (Quagliariello, 2004). The quality of credit has a relation with economic cycle. Salas and Saurina (2002) study the relation between the condition of loan and economic cycle in Spain over the period 1985-1997. They find that during the recession phases, nonperforming loans (NPLs) are increasing. In such deteriorating economic condition, the borrowers lack the capacity repay their loans. Basle Committee on Banking Supervision (1999) states that in case of credit quality deterioration, banks should make loan loss provision against profit. Banks make loan loss provisions against profits when they believe that borrowers will default; this is the tool they can use for adjusting the (historical) value of loans to reflect their true value. Provisions affect both banks profitability, since they represent a cost for the intermediary, and capital, since they reduce the book value of the assets (Quagliariello, 2004). Therefore, the increasing (decreasing) LLP is interpreted as the improvement (deterioration) of credit performance. Basle Committee on Banking Supervision (1999) classifies LLP into two categories, i.e. specific and general provision. Specific provision is reserved in order to cover a loss that is identified in an individual loans. On the other hand, general provision is reserved for latents losses that are known exist but cannot be ascribed to individual loans yet. Further, general provisions are the interim step pending the identification of losses on individual loans that are impaired. Kearns (2004) recommends banks to adjust the level of general provision based on their past experiences, current economic condition, the current rate of impairment in the loan book, changes in lending policies, loan growth and concentration of credits. Furthermore, the provision should be adequate absorb estimated credit losses associated with the loan portfolio.

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Figure 1 Banks Loan Loss Provision and Indonesian Economic Condition


40

30

20

10

1996
-10

1997

1998

1999

2000

2001

2002

2003

2004

-20 RASIO LLP/TOTLOAN

GDP GROWTH
-30

An important aspect of provisioning is its timing with respect to business cycle and the related issues of procyclicality. The common view is that an economic upswing and rising incomes indicate improving condition for firms and reduce the likelihood of loan defaults, whereas a recession will have the opposite effect (Bikker and Metzemakers, 2002). Based on Figure 1, the ratio of LLPs towards total credit significantly increased since the beginning of 1998 until April 1999. It is due to the high NPLs, some of which were then transferred to Indonesian Banking Restructuring Agancy (IBRA) to be managed. During 1999, the growth of LLPs was higher than that of credit. It indicates that banks were too prudent in supplying credit. In addition, banks also increased LLPs to improve their worsening balance sheets due to crisis. On the other hand, real GDP experienced negative growth in the same period due to economic crisis in the late 1997. The improving economy since middle 1999 was then responded by banks by decreasing their ratio of LLP to total credits. One attractive finding is provided by Bikker and Hu (2001) who evaluate the procyclicality of banks provision using unbalanced panel of 26 OECD countries from 1979 to 1999. They find that both contemporaneous and lag coefficient of GDP growth have significant and positive impact on banks provision. Some other researches have provided the same result, for example Gambacorta, Gobbi and Panetta (2001). The possible explanation of this ambiguity is that banks policy to

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smooth their income. Tax deductible, capital management and signalling hypothesis also provide explanationm for this behaviour (Kearns, 2004). Based on income-smoothing hypothesis, banks increase (decrease) their LLPs when their income is inceasing (decreasing). In this case, they make use certain expenditures, e.g. LLP, to smooth the reported income. The motivation behind income smooting can be negative or positive. Greenawalt and Sinkey (1988) propose an idea that banks may save in the good times, when they obtain high income, to anticipate the bad times. On the other hand, , Kanagaretnam et al. (2000) observe that banks smoot their income when their performance, in term of income, is over or under the industry average. They expect that government will pay extra attention to banks that deviate from the industry average. The evidence of income-smoothing hypothesis is mixed. Some studies find evidence in favor of income smoothing hypothesis (Wahlen, 1994; Scholas et al., 1990) while some do not (Ahmed et al., 1999; Kearns, 2004). The term capital management is used to decribed a situation where an institution manage its capital to asset ratio by varying the level of provision (Kearns, 2004). This behaviour is documented by Kim and Kross (1998) and Ahmed et al. (1999). This hypothesis assumes that banks with lower Tier 1 capital ratios tend to make more general provision in order to keep their capital ratios adequate (Bikker and Metzemakers, 2002). Some studies find evidence in favor of capital management (Ahmed et al., 1999; Lobo and Yang, 2001) while Collins (1995) finds against iti. Kearns (2004) also finds that there is a very little correlation betweeen the rate of provisioning and the capital to asset ratio in Irish case. In most countries, the general provisions are tax deductible. It is an incentives for banks to shift Tier 1 (pure) capital to general provision in order to lower the tax burden (Cortavarria et al., 2000). Kearns (2004) also mentions that a credit institution has a clear and unambigous incentive to increase its provisions in order to reduce its taxable income. The last possible explanantion that weaken the relationship between provision and economic cycle is signalling hypothesis. It is suggested that banks that want to signal that they are optimistic about the future incomes will reduce their current incomes by increasing provisions and vise versa. Ahmed et al. (1999) and Lobo and Yang (2000) provide qualified conclution for this hypothesis.

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Descriptive Analysis of Macroeconomic Variables Table 1 shows the expected sign and the worst extreme values of macroeconomic variables in this study while the descriptive statistic of those variables is presented in Table 2. The shocks in those variables mainly took place in crises period, in 1997 and 1998, except for solar price. We estimate the hystorical worst impact of the macroeconomic variables based on their worst extreme values in the period of this study.
Table 1 Expected Sign and Worst Extreme Values of Macroeconomic Variabels Expected Sign Worst Variable Effect to Credit Extreme Dates of Event Risk Values (%) Growth of Real GDP -6.91 April 1998 Growth of M1 + 25.42 February 1998 Growth of M2 + 24.01 Februariy1998 Growth of IHSG -37.86 September 1997 Inflation + 12.00 March 1998 SBI rate + 70.44 September 1998 Depreciation of Rupiah + 83.88 February 1998 Price of Premium + 45.20 June 1998 Price of Solar + 50.08 May 2001

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Table 2 Descriptive Statistic of Macroeconomic Variables


Macroeconomic Variables Growth of Real GDP Growth of M1 Growth of M2 Growth of IHSG Inflation SBI rate Depreciation of Rupiah Price of Premium Price of Solar Macroeconomic Variables Growth of Real GDP Growth of M1 sGrowth of M2 Growth of IHSG Inflation SBI rate Depreciation of Rupiah Price of Premium Price of Solar 2004:01-2005:05 Mean 0.009 0.005 0.006 0.027 0.006 0.075 0.007 0.017 0.014 Mean 0.009 0.018 0.019 -0.039 0.008 0.157 0.069 0.000 0.000 Max 0.022 0.038 0.033 0.128 0.018 0.080 0.063 0.282 0.241 1997 Max 0.041 0.062 0.072 0.101 0.017 0.300 0.394 0.000 0.000 Min -0.042 -0.048 -0.031 -0.379 0.000 0.106 -0.001 0.000 0.000 Std Deviasi 0.023 0.027 0.023 0.132 0.006 0.061 0.108 0.000 0.000 Mean -0.017 0.045 0.041 -0.001 0.048 0.495 0.033 0.030 0.031 Max 0.060 0.254 0.240 0.250 0.120 0.704 0.839 0.452 0.414 Min -0.016 -0.020 -0.018 -0.067 -0.002 0.073 -0.029 0.000 0.000 Std Deviasi 0.009 0.016 0.014 0.049 0.005 0.002 0.021 0.067 0.057 Mean 0.004 0.013 0.014 0.006 0.011 0.179 0.013 0.012 0.016 1995:12-2005:05 Max 0.085 0.254 0.240 0.250 0.120 0.704 0.839 0.452 0.501 Min -0.069 -0.056 -0.049 -0.379 -0.011 0.073 -0.343 -0.095 -0.220 1998 Min -0.069 -0.056 -0.049 -0.341 -0.003 0.220 -0.343 -0.095 -0.045 Std Deviasi 0.035 0.084 0.080 0.166 0.033 0.154 0.314 0.130 0.117 Std Deviasi 0.022 0.035 0.032 0.099 0.019 0.138 0.123 0.059 0.078 Mean 0.011 0.023 0.020 0.035 0.005 0.134 0.003 0.000 0.000 Max 0.027 0.042 0.034 0.076 0.030 0.139 0.011 0.000 0.000 1996 Min -0.023 0.004 0.001 -0.010 -0.007 0.128 -0.009 0.000 0.000 Std Deviasi 0.013 0.012 0.009 0.029 0.009 0.004 0.006 0.000 0.000

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4. Result of Stress Test Univariate Regression 17 Banks For the group of 17 banks, the impact of each macroeconomic variable on the ratio of NPL to Total Loan (NPL/TL) is significant and in line with the expected signs (Table 3). We find that the growth of GDP, inflation and the growth of M2 have the largest long-run coefficient, respectively. In term of the worst impact, the increase of Premium price, the depreciation of Rupiah and the growth of M2 historically produce the greatest impact on the rise of NPL/TL ratio (Table 7). The increase of Premium price consistently has the greatest impact on the rise of credit risk of these 17 banks due to it has the largest long-run coefficient (Table 3) and the greatest impact on the growth of LLP (Table 8). Table 3 also shows that the growth of M1 and the growth of M2 have quite large long-run coefficients. The growth of GDP, inflation, SBI rate and the rise of Solar price are found insignificant. This model suggests that the depreciation of Rupiah have great impact on the growth of LLP as shown in Table 8. 15 Banks The long-run coefficients of the macroeconomic variables based on univariate fixed effect and flexible form are shown in Table 5 and Table 6, respectively. The sensitivity analysis of those estimations is shown respectively in Table 9, Table 10, Table 11, Table 12, Table 13 and Table 14. Fixed Effect From the six dependent variables, the fixed effect regressions with LLP/TL, NPL/TL and D(LLP/TL) as dependent variables provide better result. For regression with LLP/TL as dependent variables, only the depreciation of Rupiah has insignificant long-run coefficient. Inflation, money growth and GDP growth are found having rather large long-run coefficients as shown in Table 5. In term of historical impact, money growth and the increase of oil price have proven produce the largest impact on LLP/TL (Table 9). For NPL/TL as dependent variables, only SBI rate has insignificant long-run coefficient. The growth of GDP has the largest long-run coefficient, followed by inflation and oil price (Table 5). In term of historical impact, the rise of Premium price has the largest impact, followed by the depreciation of Rupiah, the rise of Solar price and the growth of GDP (Table 10).

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When we estimate D(LLP/TL) as dependent variable, only the growth of IHSG has insignificant long-run coefficient (Table 5). The money growth, inflation and the growth of GDP are the most significant variables, while the depreciation of Rupiah, the rise of Premium price and the money growth have the greatest historical impact (Table 11). For regression using D(NPL/TL) as dependent variable, the oil prices show insignificant long-run coefficient. The growth of M2, the inflation, the growth of M1 and the growth of GDP have significant long-run coefficient (Table 5) while the depreciation of Rupiah, the money growth and the inflation have the greatest historical impacts (Table 12). The result of our study on the group of 15 banks suggests that the ratio of growth of LLP to total loan (G(LLP)/TL) is not an appropriate variable to measure the impact of macroeconomic variables on credit risk. For fixed effect model, none of the macroeconomic variables has long-run impact on the G(LLP)/TL, even the growth of GDP has no long-run impact (Table 14). The regression using G(LLP) as dependent variable is not appropriate also. Only the growth of M2, the inflation and the depreciation of Rupiah that have significant long-run impact (Table 13). Flexible Form The result of flexible form regression provides quite similar results. The model using G(LLP) and G(LLP)/TL provides unfavorable results. For model using G(LLP) as dependent variable, the inflation has no long-term coefficient. The growth of GDP, the growth of IHSG, the SBI rate and the rise of Premium price are found insignificant (Table 6 and Table 19). For model using G(LLP)/TL as dependent variable, only the depreciation of Rupiah and the rise of Premium price that show significant long-run impact (Table 6 and Table 20). Based on the flexible form regression, the model using D(LLP/TL) and D(NPL) provide relatively favorable result in term of expected sign. For both model, the rise of Solar price has insignificant long-run coefficient while the growth of GDP, the growth of money and the inflation show the large long-run coefficient (Table 6). In term of historical impact, the depreciation of Rupiah, the growth of money and the the rise of Premium price produce great impact in model using D(LLP/TL) as dependent variable (Table 17). In model using D(NPL/TL) as dependent variable, the growth of money, the depreciation of Rupiah and the inflation have proven produce the worst impacts. For both model with LLP/TL and NPL/TL as dependent variable, we find that the growth of GDP, the growth of money and the inflation are the most significant variables (Table 6). In term of the worst impact, the growth of M1, the growth of GDP, the growth of M2 and the inflation have the worst impact on LLP/TL in the

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period of estimation (Table 15). The growth of M1, followed by the growth of M2 and the depreciation of Rupiah as well as the inflation also produce worst impact on NPL/TL (Table 16). Multivariate Regression We consider that single macroeconomic variable shock as we estimate in the univariate regressions are not likely to occur in isolation without being related to other changes in other macroeconomic variables. Therefore, we conduct more comprehensive, multivariate stress test on the credit risk of the group of 15 large banks. The result of the multivariate regression suggests that none of the macroeconomic variables has long-run impact on D(LLP/TL) and G(LLP)/TL for both fixed effect and flexible model (Table 21, Table 22, Table 25, Table 28, table 31 and Table 34). To some extent, the model using LLP/TL, NPL/TL and G(LLP) as dependent variables provides more favorable result despite insignificance of some macroeconomic variables (Table 21, Table 22, Table 23, Table 24, Table 27, Table 29, Table 30 and Table 33). Fixed Effect For fixed effect model, the growth of GDP, the growth of IHSG and the depreciation of Rupiah have insignificant impact on credit risk, and even have no long-run impact for several dependent variables. Variables that have significant long-run impact on LLP/TL are the growth of M1, the rise of Solar price and the SBI rate. For model using NPL/TL as dependent variable, only the inflation and SBI rate have significant long-run impact. The inflation also has the most significant long-run impact on D(NPL/TL), followed by the rise of Premium price. For model with G(LLP) as dependent variable, the growth of M2 is the most significant variable, followed by the inflation, the rise of Solar price and the rise of Premium price while other variables are not significant. Flexible In flexible form regression, the growth of M2 has the largest long-run impact for four models, i.e. model using LLP/TL. NPL/TL, D(NPL/TL) and G(LLP) as dependent variables. The inflation also has significant impact on LLP/TL and NPL/TL.

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The other significant variables in this multivariate flexible model are the growth of GDP, the growth of IHSG, the SBI rate, the growth of Premium price and the rise of Solar price. The growth of GDP and the growth of IHSG have significant longrun impact on NPL/TL and G(LLP). The rise of Solar price has significant longrun on LLP/TL and G(LLP) while the SBI rate only have significant impact on D(NPL/TL) and the rise of Premium price on NPL/TL. 5. Conclusion The result of this study is sensitive to the construction of dependent variables used as the proxy of credit risk. Some of dependent variables are not appropriate to be applied in analyzing the relationship between macroeconomic shocks and the credit risk of large banks. The regressions using G(LLP)/TL as dependent variable provide unfavorable result. For multivariate regression, D(LLP/TL) is also not appropriate to employ as a proxy of credit risk. None of the macroeconomic variables has significant long-run impact on it. The univariate regressions show that the price stability indicators, i.e. the growth of money and the inflation, play great role in large banks financial stability, in term of credit risk, in Indonesia. In most regressions, those variables have significant long-run impact on the proxies of credit risk used. The condition of economy also significantly affects the credit risk of large banks, hence it is important to foster the growth of GDP as a cyclical indicator. The rise of oil prices should be taken into consideration in maintaining the banks financial stability. Based on the result of univariate regression, the rise of Premium price and Solar price have large long-run impact on some dependent variables which reflect credit risk. To summarize, the inflation is the most-often significant variable in the multivariate fixed effect model. It implies that the price stability indicator has significant relation with credit risk. The result of the multivariate flexible model regression also suggests the same conclusion, except that the most significant variable is not the inflation but the growth of M2. Overall, the result of the multivariate regression suggests the importance of price stability in order to maintain financial stability in term of credit quality.

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APPENDICES I. UNIVARIATE REGRESSION a. Long-Run Coefficient Table 3 Long Run Impact of Macroeconomic Variables Change to NPL/TL (17 Banks - Fixed Effect) Independent Variables Coeff Std Error t-value 1-tail Prob G(GDP) -23.14 3.18 -7.27 0.00 G(M1) 14.26 1.79 7.99 0.00 G(M2) 15.39 1.76 8.76 0.00 G(IHSG) -5.50 0.78 -7.02 0.00 INF 17.31 1.90 9.13 0.00 SBI 1.55 0.15 10.11 0.00 G(EXRATE) 4.54 0.77 5.88 0.00 G(PREMIUMDN) 11.21 1.95 5.73 0.00 G(SOLARDN) 1.94 0.95 2.04 0.02 Table 4 Long Run Impact of Macroeconomic Variables Change to G(LLP) (17 Banks - Fixed Effect) Independent Variables Coeff Std Error t-value 1-tail Prob G(GDP) 0.31 1.18 0.26 0.40 G(M1) 4.07 0.99 4.12 0.00 G(M2) 3.77 0.74 5.10 0.00 G(IHSG) -3.05 0.56 -5.49 0.00 INF 1.76 1.45 1.22 0.11 SBI -0.16 0.20 -0.78 0.22 G(EXRATE) 3.05 0.48 6.30 0.00 G(PREMIUMDN) 6.22 1.04 6.00 0.00 G(SOLARDN) -0.62 0.21 -2.89 0.00

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Table 5 Long Run Impact of Macroeconomic Variables Change to Credit Risk (15 Banks - Fixed Effect)
LLP/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Coeff -1.88 3.47 3.81 -0.43 4.22 0.39 -0.12 1.39 1.48 Coeff -0.52 0.59 0.79 -0.20 0.69 0.03 0.23 0.07 -0.05 StdError t-value 0.25 -7.62 0.54 6.48 0.61 6.25 0.12 -3.72 0.63 6.69 0.05 7.73 0.18 -0.65 0.38 3.64 0.40 3.65 D (NPL/TL) StdError 0.19 0.09 0.11 0.03 0.10 0.01 0.03 0.06 0.05 t-value -2.78 6.74 7.33 -7.03 6.85 2.07 7.88 1.09 -1.11 Coeff -20.76 1.35 1.44 -0.31 11.80 0.88 3.57 8.30 4.82 NPL/TL StdError 2.23 0.12 0.12 0.05 1.18 0.88 0.60 1.81 1.36 G (LLP) StdError 1.30 0.75 1.04 0.35 1.03 0.14 0.51 0.45 0.24 t-value -9.29 11.54 11.66 -6.64 9.97 0.88 5.96 4.58 3.55 Coeff -0.53 0.34 0.38 -0.01 0.31 0.02 0.17 0.30 0.06 Coeff -2.58 -2.91 2.76 1.14 0.01 -0.15 -0.97 -0.67 D (LLP/TL) StdError t-value 0.11 -4.83 0.07 4.97 0.08 5.00 0.02 -0.69 0.06 5.57 0.01 2.45 0.03 6.52 0.06 4.87 0.04 1.67 G (LLP/TL) StdError 1.15 1.26 0.64 2.11 0.23 0.45 0.62 0.54 t-value -2.25 -2.31 4.33 0.54 0.02 -0.34 -1.57 -1.25

Coeff 0.47 0.17 1.99 -0.53 3.33 -0.23 2.16 -0.46 -0.70

t-value 0.37 0.23 1.90 -1.49 3.24 -1.61 4.22 -1.01 -2.87

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Table 6 Long Run Impact of Macroeconomic Variable Changes to Credit Risk (15 Banks - Flexible Form)
LLP/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN)DN Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Coeff -8.52 3.82 2.11 -0.33 2.28 0.23 -0.77 0.24 0.40 StdError t-value 1.48 -5.75 0.80 4.76 0.57 3.68 0.09 -3.75 0.71 3.20 0.07 3.58 0.15 -5.21 0.19 1.25 0.22 1.81 D (NPL/TL) StdError 0.14 0.06 0.07 0.03 0.07 0.01 0.02 0.04 0.04 t-value -3.64 8.77 8.89 -7.13 9.13 3.47 7.43 1.98 0.56 Coeff -16.29 8.60 8.89 -0.84 10.98 0.88 2.04 -0.91 0.43 NPL/TL StdError 1.90 0.66 0.68 0.20 0.93 0.07 0.47 0.42 0.45 G (LLP) StdError 0.92 0.61 0.59 0.30 0.06 0.41 0.40 0.34 t-value -8.58 13.03 13.01 -4.14 11.83 13.08 4.33 -2.14 0.95 Coeff -0.51 0.24 0.32 -0.03 0.22 0.02 0.14 0.13 -0.01 D (LLP/TL) StdError t-value 0.09 -5.36 0.04 5.84 0.05 5.88 0.01 -3.04 0.04 6.12 0.01 3.47 0.02 6.30 0.03 4.36 0.02 -0.62 G (LLP/TL) StdError 0.46 0.28 0.31 0.08 0.38 0.03 0.13 0.22 0.14 t-value 0.66 0.05 0.13 2.54 0.85 0.26 2.32 2.22 -0.10

Coeff -0.52 0.56 0.64 -0.18 0.60 0.02 0.16 0.09 0.02

Coeff -0.52 1.29 2.16 -0.43 0.02 2.23 0.28 0.87

t-value -0.57 2.12 3.67 -1.43 0.31 5.49 0.70 2.58

Coeff 0.30 0.01 0.04 0.19 0.33 0.01 0.30 0.49 -0.01

b. Sensitivity Test Table 7 Sensitivity Test NPL/TL 17 Banks (Fixed Effect) NPL/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -20.06 7.68 8.61 -14.66 10.07 11.59 3.28 18.60 2.75 Worst Case 159.93 362.44 369.41 208.33 207.75 109.08 381.04 506.51 97.18 1996 -25.86 33.00 30.73 -19.07 8.44 20.68 1.24 1997 -19.77 25.01 28.88 21.17 14.15 24.38 31.31 1998 38.16 64.76 62.47 0.42 82.87 76.59 14.86 33.31 5.98

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Table 8 Sensitivity Test G(LLP) 17 Banks (Fixed Effect)


G(LLP) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line 2004:01-2005:05) n.s. 2.19 2.11 -8.13 n.s. n.s. 2.20 10.33 n.s. Worst Case n.s 103.49 90.49 115.59 n.s. n.s 256.06 281.24 n.s. 1996 n.s. 9.42 7.53 -10.58 n.s. n.s. 0.83 n.s. 1997 n.s. 7.14 7.07 11.75 n.s. n.s. 21.04 n.s. 1998 n.s. 18.49 15.30 0.23 n.s. n.s. 9.98 18.49 n.s.

Table 9 Sensitivity Test LLP/TL 15 Banks (Fixed Effect)


LLP/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -1.63 1.87 2.14 -1.16 2.46 2.96 n.s. 2.30 2.10 Worst Case 12.97 88.18 81.57 16.44 50.68 27.82 n.s. 62.72 73.99 1996 -2.10 8.03 7.62 -1.50 2.06 5.27 n.s. 1997 -1.60 6.08 7.16 1.67 3.45 6.22 n.s. 1998 3.09 15.76 15.48 0.03 20.22 19.53 n.s. 4.12 4.55

Table 10 Sensitivity Test NPL/TL 15 Banks (Fixed Effect)


NPL/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -18.00 0.73 0.81 -0.82 6.87 n.s. 2.57 13.77 6.84 Worst Case 143.51 34.37 34.54 11.71 141.64 n.s. 299.22 375.12 241.44 1996 -23.20 3.13 2.87 -1.07 5.75 n.s. 0.97 1997 -17.74 2.37 2.70 1.19 9.65 n.s. 24.59 1998 34.24 6.14 5.84 0.02 56.5 n.s. 11.67 24.67 14.86

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Table 11 Sensitivity Test D(LLP/TL )15 Banks (Fixed Effect) D(LLP/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.46 0.18 0.22 n.s. 0.18 0.18 0.13 0.50 0.09 Worst Case 3.67 8.58 9.24 n.s. 3.70 1.69 14.59 13.72 3.23 1996 -0.59 0.78 0.77 n.s. 0.15 0.32 0.05 1997 -0.45 0.59 0.72 n.s. 0.25 0.38 1.20 1998 0.88 1.53 1.56 n.s. 1.48 1.19 0.57 0.90 0.20

Table 12 Sensitivity Test D(NPL/TL )15 Banks (Fixed Effect) D(NPL/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.45 0.32 0.44 -0.52 0.40 0.21 0.16 n.s. n.s. Worst Case 3.62 15.04 19.01 7.45 8.28 1.95 19.03 n.s. n.s. 1996 -0.59 1.37 1.58 -0.68 0.34 0.37 0.06 n.s. n.s. 1997 -0.45 1.04 1.49 0.76 0.56 0.44 1.56 n.s. n.s. 1998 0.86 2.69 3.22 0.02 3.30 1.37 0.74 n.s. n.s.

Table 13 Sensitivity Test G(LLP)15 Banks (Fixed Effect)


G(LLP) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI Base Line (2004:012005:05) n.s. n.s. 1.11 n.s. 1.94 n.s. Worst Case n.s. n.s. 47.72 n.s. 39.94 n.s. 1996 n.s. n.s. 3.97 n.s. 1.62 n.s. 1997 n.s. n.s. 3.73 n.s. 2.72 n.s. 1998 n.s. n.s. 8.07 n.s. 15.93 n.s.

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G(LLP) Independent Variables G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) 1.56 n.s. n.s. Worst Case 181.43 n.s. n.s. 1996 0.59 n.s. n.s. 1997 14.91 n.s. n.s. 1998 7.07 n.s. n.s.

Table 14 Sensitivity Test G(LLP)/TL 15 Banks (Fixed Effect)


G(LLP)/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. Worst Case n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. 1996 n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. 1997 n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. 1998 n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s.

Table 15 Sensitivity Test LLP/TL 15 Banks (Flexible Form)


Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -7.38 2.06 1.18 -0.87 1.33 1.75 n.s. n.s. 0.56 LLP/TL Worst 1996 Case 58.87 97.09 50.73 12.40 27.38 16.50 n.s. n.s. 19.91 -9.52 8.84 4.22 -1.13 1.11 3.13 n.s. n.s. -

1997 -7.28 6.70 3.97 1.26 1.86 3.69 n.s. n.s. -

1998 14.05 17.35 8.58 0.03 10.92 11.59 n.s. n.s. 1.23

Table 16 Sensitivity Test NPL/TL 15 Bank (Flexible Form)


Independent Variables G(GDP) Base Line (2004:012005:05) -14.12 NPL/TL Worst Case 1996 112.62 -18.21

1997 -13.92

1998 26.87

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Independent Variables G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN)

Base Line (2004:012005:05) 4.64 4.98 -2.23 6.39 6.61 1.47 n.s. n.s.

NPL/TL Worst 1996 Case 218.70 213.47 31.74 131.81 62.20 170.87 n.s. n.s. 19.92 17.76 -2.91 5.35 11.79 0.55 n.s. n.s.

1997 15.09 16.69 3.23 8.98 13.90 14.04 n.s. n.s.

1998 39.08 36.1 0.06 52.58 43.67 6.66 n.s. n.s.

29

Table 17 Sensitivity Test D(LLP/TL) 15 Banks (Flexible Form) D(LLP/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.44 0.13 0.18 -0.08 0.13 0.14 0.10 0.22 n.s. Worst Case 3.51 6.14 7.58 1.12 2.66 1.30 11.47 6.07 n.s. 1996 -0.57 0.56 0.63 -0.10 0.11 0.25 0.04 n.s. 1997 -0.43 0.42 0.59 0.11 0.18 0.29 0.94 n.s. 1998 0.84 1.10 1.28 0.00 1.06 0.91 0.45 0.40 n.s.

Table 18 Sensitivity Test D(NPL/TL) 15 Banks (Flexible Form) DNPL/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.45 0.30 0.36 -0.48 0.35 0.14 0.11 0.15 n.s. Worst Case 3.59 14.24 15.43 6.80 7.14 1.30 13.34 3.98 n.s. 1996 -0.58 1.30 1.28 -0.62 0.29 0.25 0.04 n.s. 1997 -0.44 0.98 1.21 0.69 0.49 0.29 1.10 n.s. 1998 0.86 2.54 2.61 0.01 2.85 0.91 0.52 0.26 n.s.

Table 19 Sensitivity Test G(LLP) 15 Banks (Flexible Form) G(LLP) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI Base Line (2004:012005:05) n.s. 0.70 1.21 n.s. n.s. Worst Case n.s. 32.90 51.94 n.s. n.s. 1996 n.s. 3.00 4.32 n.s. n.s. 1997 n.s. 2.27 4.06 n.s. n.s. 1998 n.s. 5.88 8.78 n.s. n.s.

30

G(LLP) Independent Variables G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) 1.61 n.s. 1.23 Worst Case 186.92 n.s. 43.53 1996 0.61 n.s. 1997 15.36 n.s. 1998 7.29 n.s. 2.68

Table 20 Sensitivity Test G(LLP)/TL 15 Banks (Flexible Form) G(LLP)/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. n.s. n.s. n.s. n.s. 0.22 0.82 n.s. Worst Case n.s. n.s. n.s. n.s. n.s. n.s. 25.29 22.25 n.s. 1996 n.s. n.s. n.s. n.s. n.s. n.s. 0.08 n.s. 1997 n.s. n.s. n.s. n.s. n.s. n.s. 2.08 n.s. 1998 n.s. n.s. n.s. n.s. n.s. n.s. 0.99 1.46 n.s.

31

II. MULTIVARIATE REGRESSION (9 Macroeconomic Variables) a. Long-Run Coefficient Table 21 Long Run Impact of 9 Macroeconomic Variables Change to Credit Risk 15 Banks - Fixed Effect Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) LLP/TL Coeff StdError t-value 1.43 0.47 3.06 0.55 0.24 2.34 -1.17 0.52 -2.24 0.48 0.07 6.57 0.53 0.14 D (NPL/TL) 3.92 Coeff 2.44 3.31 -2.02 0.12 9.54 0.44 -0.83 -0.78 NPL/TL D (LLP/TL) StdError t-value Coeff StdError t-value 1.97 1.24 3.15 1.05 3.26 -0.62 0.20 0.58 2.74 3.48 0.23 1.97 0.29 -2.90 0.32 -2.43 G (LLP) G (LLP/TL) -

Coeff StdError t-value Coeff StdError t-value Coeff StdError t-value -0.17 4.07 -0.04 -0.22 0.10 -2.29 -112.33 12.60 -8.92 114.40 13.95 8.20 -0.01 0.51 -0.01 1.45 0.18 7.86 22.29 9.27 2.40 -0.03 0.02 -1.49 -0.36 0.71 -0.50 -0.01 0.03 -0.22 -4.75 1.57 -3.02 0.10 0.03 3.12 1.08 0.56 1.92 2.74 0.69 4.00 -

Table 22 Long Run Impact of 9 Macroeconomic Variables Change to Credit Risk 15 Bank - Flexible Form
Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) LLP/TL Coeff -5.52 8.36 4.44 -0.15 StdError 1.91 2.35 1.07 0.14 t-value -2.89 3.56 4.15 -1.07 Coeff -3.08 -3.90 9.75 -0.42 3.84 -0.03 NPL/TL StdError 0.95 1.80 2.34 0.21 1.22 0.15 t-value -3.25 -2.17 4.17 -1.96 3.14 -0.19 Coeff D(LLP/TL) StdError t-value -

32

Independent Variables G(PREMIUMDN) G(SOLARDN) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN)

LLP/TL Coeff 0.57 StdError 0.18 D(NPL/TL) Coeff -0.97 0.76 0.04 0.13 StdError 0.20 0.18 0.01 0.02 t-value -4.84 4.09 2.77 8.59 Coeff -11.51 -29.87 64.80 -1.02 -10.04 -1.60 -3.81 0.72 2.20 t-value 3.14 Coeff 0.79 -

NPL/TL StdError 0.25 G(LLP) StdError 2.14 6.00 8.40 0.30 3.13 0.30 0.70 0.54 0.41 t-value -5.38 -4.98 7.71 -3.41 -3.21 -5.30 -5.44 1.34 5.36 Coeff t-value 3.21 Coeff -

D(LLP/TL) StdError G(LLP/TL) StdError t-value t-value -

b. Scenario Analysis Table 23 Scenario Analysis LLP/TL 15 Banks (Fixed Effect) LLP/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. 0.30 n.s. 3.59 0.76 Worst Case n.s. 14.05 n.s. 33.75 26.76 1996 n.s. 1.28 n.s. 6.40 1997 n.s. 0.97 n.s. 7.54 1998 n.s. 2.51 n.s. 23.69 1.65

Table 24 Scenario Analysis NPL/TL 15 Banks (Fixed Effect) NPL/TL Independent Variables G(GDP) G(M1) Base Line (2004:012005:05) n.s. n.s. Worst Case n.s. n.s. 1996 n.s. n.s. 1997 n.s. n.s. 1998 n.s. n.s.

33

NPL/TL Independent Variables G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. 5.55 3.33 n.s. n.s. Worst Case n.s. n.s. 114.51 31.28 n.s. n.s. 1996 n.s. n.s. 4.65 5.93 n.s. n.s. 1997 n.s. n.s. 7.80 6.99 n.s. n.s. 1998 n.s. n.s. 45.67 21.96 n.s. n.s. -

Table 25 Scenario Analysis D(LLP/TL) 15 Banks (Fixed Effect) D(LLP/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) Worst Case 1996 1997 1998 -

Table 26 Scenario Analysis D(NPL/TL) 15 Banks (Fixed Effect) D(NPL/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. 0.84 n.s. n.s. 0.17 Worst Case n.s. 17.38 n.s. n.s. 4.50 1996 n.s. 0.71 n.s. n.s. 1997 n.s. 1.18 n.s. n.s. 1998 n.s. 6.93 n.s. n.s. 0.30 -

34

Table 27 Scenario Analysis G(LLP) 15 Banks (Fixed Effect) G(LLP) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. 64.03 n.s. 12.97 n.s. n.s. 1.80 3.89 Worst Case n.s. n.s. 2746.40 n.s. 267.58 n.s. n.s. 49.04 137.17 1996 n.s. n.s. 228.48 n.s. 10.87 n.s. n.s. 1997 n.s. n.s. 214.68 n.s. 18.22 n.s. n.s. 1998 n.s. n.s. 464.41 n.s. 106.73 n.s. n.s. 3.22 8.44

Table 28 Scenario Analysis G(LLP)/TL 15 Banks (Fixed Effect) G(LLP)/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) Worst Case 1996 1997 1998 -

35

Table 29 Scenario Analysis LLP/TL 15 Banks (Flexible Form) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) n.s. 4.68 2.59 n.s. 0.80 LLP/TL Worst Case 1996 n.s. n.s. 200.73 53.34 n.s. 28.36 16.70 2.17 n.s. -

1997 n.s. 15.69 3.63 n.s. -

1998 n.s. 33.94 21.28 n.s. 1.74

Table 30 Scenario Analysis NPL/TL 15 Banks (Flexible Form) NPL/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -2.67 n.s. 5.46 -1.12 2.23 n.s. 1.32 Worst Case 21.26 n.s. 233.98 -10.51 46.08 n.s. 35.84 1996 -3.44 n.s. 19.46 -1.46 1.87 n.s. 1997 -2.63 n.s. 18.29 1.62 3.14 n.s. 1998 -2.67 n.s. 39.56 0.03 18.38 n.s. 2.36 -

36

Table 31 Scenario Analysis D(LLP/TL) 15 Banks (Flexible Form) D(LLP/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) Worst Case 1996 1997 1998 -

Table 32 Scenario Analysis D(NPL/TL) 15 Banks (Flexible Form) D(NPL/TL) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. 0.42 n.s. 0.97 Worst Case n.s. 18.13 n.s. 9.14 1996 n.s. 1.51 n.s. 1.73 1997 n.s. 1.42 n.s. 2.04 1998 n.s. 3.07 n.s. 6.41 -

37

Table 33 Scenario Analysis G(LLP) 15 Banks (Flexible Form) G(LLP) Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -9.98 n.s. 36.27 -2.71 n.s. n.s. n.s. n.s. 3.12 Worst Case 79.55 n.s. 1555.67 38.48 n.s. n.s. n.s. n.s. 109.99 1996 -12.86 n.s. 129.42 -3.52 n.s. n.s. n.s. n.s. 1997 -9.83 n.s. 121.60 3.91 n.s. n.s. n.s. n.s. 1998 18.98 n.s. 263.06 0.08 n.s. n.s. n.s. n.s. 6.77

Table 34 Scenario Analysis G(LLP)/TL 15 Banks (Flexible Form) G(LLP)/TL Independent Variables G(GDP) G(M1) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) Worst Case 1996 1997 1998 -

38

III.

MULTIVARIATE REGRESSION (8 Macroeconomic Variables) Table 35 Long Run Impact of 8 Macroeconomic Variables Change (Without M1) to Credit Risk (15 Banks - Fixed Effect) LLP/TL NPL/TL t-value 2.73 -3.52 5.45 2.92 -2.73 4.24 Coeff StdError 0.95 0.64 4.79 1.25 0.03 0.20 14.23 -0.25 -1.36 0.64 3.34 0.28 0.36 0.47 G (LLP) Coeff StdError 17.21 1.62 -0.20 7.08 -0.31 -10.26 2.68 -3.60 3.39 4.63 0.51 6.88 0.57 1.56 1.21 0.98 t-value 5.08 0.35 -0.39 1.03 -0.54 -6.56 2.22 -3.66 D (LLP/TL) t-value Coeff StdError 4.79 3.83 0.13 4.27 -0.89 -3.73 1.35 0.03 0.01 G (LLP/TL) Coeff StdError tvalue tvalue 4.32 -

a. Long-Run Coefficient

Coeff StdError G(GDP) G(M2) 1.02 0.37 G(IHSG) INF 3.06 0.87 SBI 0.48 0.09 G(EXRATE) 0.27 0.09 G(PREMIUMDN) 0.66 0.24 G(SOLARDN) 0.93 0.22 Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN)

Independent Variables

D (NPL/TL) Coeff StdError t-value 0.26 0.09 -2.87 0.37 0.12 3.04 1.43 0.18 7.78 0.02 -3.60 0.07 -0.16 0.03 -5.07 0.16 0.03 4.79 -

39

Table 36 Long Run Impact of 8 Macroeconomic Variables Change (Without GM1) to Credit Risk (15 Banks - Flexible Form)
Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) LLP/TL Coeff 2.18 -4.98 0.68 5.45 0.49 0.88 -1.41 0.75 StdError 0.84 1.48 0.23 1.48 0.12 0.30 0.37 0.35 D (NPL/TL) Coeff -0.26 -0.08 0.51 -0.02 StdError 0.06 0.02 0.12 0.01 t-value -4.56 -4.74 4.26 -1.94 Coeff -13.17 -1.86 -2.62 29.71 -3.63 1.64 -1.88 -0.91 t-value 2.58 -3.37 3.02 3.67 3.98 2.93 -3.85 2.13 Coeff -1.21 1.37 0.07 -0.76 0.74 -0.63 -0.59 NPL/TL StdError 0.76 0.37 0.17 1.18 0.10 0.21 0.18 G (LLP) StdError 3.10 2.89 0.42 5.35 0.63 0.95 0.49 0.23 t-value -4.25 -0.64 -6.22 5.55 -5.75 1.73 -3.88 -3.91 Coeff t-value -1.60 3.70 0.44 -0.65 7.40 -3.07 -3.34 Coeff 0.02 0.03 D (LLP/TL) StdError 0.01 0.01 G (LLP/TL) StdError t-value t-value 3.32 1.97

40

Table 37 Long Run Impact of 8 Macroeconomic Variables Change (Without GM2) to Credit Risk (15 Banks - Fixed Effect)
Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) LLP/TL Coeff 0.29 3.99 -2.02 1.02 Coeff -0.26 0.37 1.48 -0.08 -0.17 0.16 StdError 0.12 0.69 0.39 0.27 D (NPL/TL) StdError 0.09 0.11 0.18 0.02 0.03 0.03 t-value -2.88 3.49 8.01 -3.91 -5.51 4.90 Coeff 19.98 -27.36 4.00 14.95 2.11 -3.18 2.72 0.79 t-value 2.33 5.77 -5.19 3.74 Coeff -2.43 2.77 -0.13 10.08 -0.16 -0.20 NPL/TL StdError 2.27 0.64 0.24 2.72 0.25 0.49 G (LLP) StdError 4.85 4.37 0.80 6.25 0.61 1.05 0.65 0.81 t-value 4.12 -6.26 5.00 2.39 3.48 -3.02 4.19 0.97 Coeff t-value -1.07 4.34 -0.54 3.71 -0.63 -0.41 Coeff -0.21 2.08 0.00 0.65 -0.20 -0.25 -0.09 0.31 D (LLP/TL) StdError 0.62 1.02 0.09 1.26 0.10 0.20 0.19 0.15 G (LLP/TL) StdError t-value t-value -0.34 2.03 -0.06 0.51 -1.95 -1.25 -0.50 2.07

41

Table 38 Long Run Impact of 8 Macroeconomic Variables Change (Without GM2) to Credit Risk (15 Banks - Flexible Form) LLP/TL Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Coeff StdError 0.85 0.27 0.35 0.06 0.20 0.07 1.17 0.28 0.61 0.26 D (NPL/TL) Coeff StdError 0.60 0.07 -0.13 0.02 tvalue 3.16 5.46 2.73 4.14 2.33 tvalue 8.16 -6.90 NPL/TL Coeff StdError 2.17 1.24 0.15 0.18 0.29 1.36 0.90 0.16 0.30 0.13 -1.89 0.38 G (LLP) Coeff StdError 0.74 2.62 -1.49 1.08 1.49 0.38 9.62 3.07 -1.14 0.36 0.35 0.19 -0.59 0.32 1.23 0.22 t-value 1.76 0.85 0.21 5.73 2.36 -4.95 D (LLP/TL) tCoeff StdError value 0.01 0.00 2.68 0.02 0.01 3.12 G (LLP/TL) tCoeff StdError value -

t-value 0.28 -1.38 3.91 3.13 -3.18 1.84 -1.81 5.68

42

b. Scenario Analysis Table 39 Scenario Analysis (Without GM1) LLP/TL 15 Banks (Fixed Effect) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) 0.57 n.s. 3.56 0.20 n.s. 1.32 LLP/TL Worst 1996 Case 24.42 2.03 n.s. n.s. 33.51 22.70 n.s. 46.67 6.35 0.07 n.s. -

1997 1.91 n.s. 7.49 1.86 n.s. -

1998 4.13 n.s. 23.53 0.89 n.s. 2.87

Table 40 Scenario Analysis (Without GM1) NPL/TL 15 Banks (Fixed Effect) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) n.s. 2.68 n.s. 8.28 n.s. n.s. n.s. NPL/TL Worst Case 1996 n.s. n.s. 115.11 n.s. 170.84 n.s. n.s. n.s. 9.58 n.s. 6.94 n.s. n.s. n.s. -

1997 n.s. 9.00 n.s. 11.64 n.s. n.s. n.s. -

1998 n.s. 19.46 n.s. 68.14 n.s. n.s. n.s. -

Table 41 Scenario Analysis (Without GM1) D(LLP/TL) 15 Banks (Fixed Effect) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) 0.25 D(LLP/TL) Worst Case 1996 2.31 0.44 -

1997 0.52 -

1998 1.62 -

43

Table 42 Scenario Analysis (Without GM1) D(NPL/TL) 15 Banks (Fixed Effect) D(NPL/TL) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.23 0.21 0.83 n.s. n.s. 0.26 Worst Case 1.81 8.85 17.13 n.s. n.s. 7.12 1996 -0.29 0.74 0.70 n.s. n.s. 1997 -0.22 0.69 1.17 n.s. n.s. 1998 0.43 1.50 6.83 n.s. n.s. 0.47 -

Table 43 Scenario Analysis (Without GM1) G(LLP) 15 Banks (Fixed Effect) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) n.s. n.s. n.s. n.s. n.s. n.s. 4.46 n.s. G(LLP) Worst 1996 Case n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. n.s. 121.33 n.s. n.s.

1997 n.s. n.s. n.s. n.s. n.s. n.s. n.s.

1998 n.s. n.s. n.s. n.s. n.s. n.s. 7.98 n.s.

Table 44 Scenario Analysis (Without GM1) G(LLP)/TL 15 Banks (Fixed Effect) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) G(LLP)/TL Worst Case 1996 -

1997 -

1998 44

Table 45 Scenario Analysis (Without GM1) LLP/TL 15 Banks (Flexible Form) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. n.s. 3.17 3.70 0.64 n.s. 1.06 LLP/TL Worst Case 1996 n.s. n.s. n.s. n.s. n.s. n.s. 65.43 34.80 74.13 n.s. 37.36 2.66 6.60 0.24 n.s. -

1997 n.s. n.s. n.s. 4.46 7.78 6.09 n.s. -

1998 n.s. n.s. n.s. 26.10 24.43 2.89 n.s. 2.30

Table 46 Scenario Analysis (Without GM1) NPL/TL 15 Banks (Flexible Form) NPL/TL Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. 0.77 n.s. n.s. 5.57 n.s. n.s. Worst Case n.s. 32.94 n.s. n.s. 52.40 n.s. n.s. 1996 n.s. 2.74 n.s. n.s. 9.93 n.s. n.s. 1997 n.s. 2.57 n.s. n.s. 11.71 n.s. n.s. 1998 n.s. 5.57 n.s. n.s. 36.79 n.s. n.s.

45

Table 47 Scenario Analysis (Without GM1) D(LLP/TL) 15 Banks (Flexible Form) D(LLP/TL) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) 0.02 0.04 Worst Case 2.09 1.44 1996 0.01 1997 0.17 1998 0.08 0.09

Table 48 Scenario Analysis (Without GM1) D(NPL/TL) 15 Banks (Flexible Form) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.23 -0.20 0.30 n.s. D(NPL/TL) Worst Case 1996 1.80 -0.29 2.85 6.17 n.s. -0.26 0.25 n.s. -

1997 -0.22 0.29 0.42 n.s. -

1998 0.43 0.01 2.46 n.s. -

46

Table 49 Scenario Analysis (Without GM1) G(LLP) 15 Banks (Flexible Form) G(LLP) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -11.41 n.s. -6.97 17.29 n.s. 1.18 n.s. n.s. Worst Case 91.02 n.s. 1996 14.72 n.s. 1997 -11.25 n.s. 10.07 24.29 n.s. 11.30 n.s. n.s. 1998 21.72 n.s. 0.20 142.26 n.s. 5.36 n.s. n.s.

99.09 -9.07 356.65 14.49 n.s. n.s. 137.51 n.s. n.s. 0.45 n.s. n.s.

Table 50 Scenario Analysis (Without GM1) G(LLP)/TL 15 Banks (Flexible Form) Independent Variables G(GDP) G(M2) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) G(LLP)/TL Worst Case 1996 -

1997 -

1998 -

Table 51 Scenario Analysis (Without GM2) LLP/TL 15 Banks (Fixed Effect) LLP/TL Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) n.s. 2.32 n.s. 1.44 Worst Case n.s. 47.90 n.s. 50.89 1996 n.s. 1.95 n.s. 1997 n.s. 3.26 n.s. 1998 n.s. 19.11 n.s. 3.13

47

Table 52 Scenario Analysis (Without GM2) NPL/TL 15 Banks (Fixed Effect) NPL/TL Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -2.11 1.49 n.s. 5.87 n.s. n.s. Worst Case 16.81 70.32 n.s. 121.06 n.s. n.s. 1996 -2.72 6.40 n.s. 4.92 n.s. n.s. 1997 -2.08 4.85 n.s. 8.25 n.s. n.s. 1998 4.01 12.57 n.s. 48.29 n.s. n.s. -

Table 53 Scenario Analysis (Without GM2) D(LLP/TL) 15 Banks (Fixed Effect) D(LLP/TL) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. 1.12 n.s. n.s. n.s. n.s. n.s. 0.43 Worst Case n.s. 52.79 n.s. n.s. n.s. n.s. n.s. 15.30 1996 n.s. 4.81 n.s. n.s. n.s. n.s. n.s. 1997 n.s. 3.64 n.s. n.s. n.s. n.s. n.s. 1998 n.s. 9.43 n.s. n.s. n.s. n.s. n.s. 0.94

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Table 54 Scenario Analysis (Without GM2) D(NPL/TL)15 Banks (Fixed Effect) D(NPL/TL) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) -0.23 0.20 0.86 n.s. n.s. 0.27 Worst Case 1.80 9.40 17.73 n.s. n.s. 7.25 1996 -0.29 0.86 0.72 n.s. n.s. 1997 -0.22 0.65 1.21 n.s. n.s. 1998 0.43 1.68 7.07 n.s. n.s. 0.48 -

Table 55 Scenario Analysis (Without GM2) G(LLP) 15 Banks (Fixed Effect) G(LLP) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. n.s. 8.70 15.80 n.s. 4.52 n.s. Worst Case n.s. n.s. n.s. 179.44 148.64 n.s. 122.99 n.s. 1996 n.s. n.s. n.s. 7.29 28.18 n.s. n.s. 1997 n.s. n.s. n.s. 12.22 33.21 n.s. n.s. 1998 n.s. n.s. n.s. 71.57 104.36 n.s. 8.09 n.s.

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Table 56 Scenario Analysis (Without GM2) G(LLP)/TL 15 Banks (Fixed Effect) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:01-2005:05) G(LLP)/TL Worst Case 1996 -

1997 -

1998 -

Table 57 Scenario Analysis (Without GM2) LLP/TL 15 Banks (Flexible Form) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) 0.46 2.64 0.14 1.94 0.87 LLP/TL Worst Case 21.53 24.84 16.51 52.90 30.64

1996 1.96 4.71 0.05 -

1997 1.49 5.55 1.36 -

1998 3.85 17.44 0.64 3.48 1.89

Table 58 Scenario Analysis (Without GM2) NPL/TL 15 Banks (Flexible Form) NPL/TL Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. n.s. 6.75 0.22 n.s. Worst Case n.s. n.s. n.s. 63.52 25.42 n.s. 1996 n.s. n.s. n.s. 12.04 0.08 n.s. 1997 n.s. n.s. n.s. 14.20 2.09 n.s. 1998 n.s. n.s. n.s. 44.60 0.99 n.s. -

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Table 59 Scenario Analysis (Without GM2) D(LLP/TL ) 15 Banks (Flexible Form) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) 0.07 0.02 D(LLP/TL) Worst Case 1996 0.70 0.13 1.78 0.01 -

1997 0.16 0.15 -

1998 0.49 0.07 -

Table 60 Scenario Analysis (Without GM2) D(NPL/TL ) 15 Banks (Flexible Form) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) 0.35 n.s. D(NPL/TL) Worst Case 1996 7.19 0.29 n.s. n.s. -

1997 0.49 n.s. -

1998 2.87 n.s. -

Table 61 Scenario Analysis (Without GM2) G(LLP) 15 Banks (Flexible Form) Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) n.s. n.s. n.s. 5.60 n.s. 0.25 n.s. 1.74 G(LLP) Worst Case 1996 n.s. n.s. n.s. n.s. n.s. n.s. 115.49 n.s. 29.62 n.s. 61.47 4.69 n.s. 0.10 n.s. -

1997 n.s. n.s. n.s. 7.87 n.s. 2.43 n.s. -

1998 n.s. n.s. n.s. 46.06 n.s. 1.15 n.s. 3.78

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Table 62 Scenario Analysis (Without GM2) G(LLP)/TL 15 Banks (Flexible Form) G(LLP)/TL Independent Variables G(GDP) G(M1) G(IHSG) INF SBI G(EXRATE) G(PREMIUMDN) G(SOLARDN) Base Line (2004:012005:05) Worst Case 1996 1997 1998 -

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