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THE EFFECT OF CREDIT AND LIQUIDITY RISK AGAINST SYSTEMIC RISK IN FOUR ASEAN
BANKS

Rinda Siaga Pangestuti

Management Department of ‘45’ Islamic University
Email: [email protected]

ARTICLE INFO Abstract

Article History: This study examines the effect of credit risk and liquidity
Received 22 May 2018 risk on the potential increases in systemic risk of the banking
Revised 15 June 2018 sector in four ASEAN banks. Two systemic risk measurements,
Accepted 15 July 2018 namely dCoVaR and MES, are used in order to evaluate the effect
of credit risk and liquidity risk on systemic risk of individual bank
JEL Classification: (dCoVaR) and systemic risk when the market is in distress (MES).
E51, G21 The result from the regressions shows that credit risk and
liquidity risk significantly affect systemic risk at the market
Keywords: distress. Meanwhile, credit risk and liquidity risk do not affect
Systemic Risk, systemic risk of individual bank. The crisis affects systemic risk is
Credit Risk, and showed by two regressions which are conducted in four ASEAN
Liquidity Risk banks. The result is interesting because when the regression is
conducted for all the countries, there is a positive and significant
effect of crisis on systemic risk in four ASEAN banks, but when it
is conducted for each country (as an additional analysis), not all
the countries are affected by the crisis.

INTRODUCTION Empirically, systemic risk can be

Bank is an institution that is vulnerable to measured by delta Conditional Value at Risk
the financial and macroeconomic condition (dCoVaR) (Girardi and Ergun, 2013), Marginal
due to its function as the fund collector and Expected Shortfall (MES) (Acharya et al., 2010),
distributor in the financial system (Hadad et al., Component Expected Shortfall (CES)
2003). Therefore, the bank default will affect (Banulescu and Dumitrescu, 2012), and
the financial system that can lead into domino Systemic RISK Measure (SRISK) (Acharya et al.,
and systemic effect (Acharya, 2010; Patro et al., 2012). Girardi and Ergun (2013) explained
2013). Lo (2008) mentioned that systemic risk dCoVaR as the difference percentage of CoVaR
could not be eliminated, where systemic events when the bank is in distress to the one when it
would give the negative effect to the financial is not. Acharya et. al. (2010) explained that MES
market and economy (Patro et al., 2013), and corresponds to the bank expected equity loss
also would cause bank closures by the when market falls below a certain threshold,
monetary authority (Arena, 2008). If the 5%. Banulescu and Dumitrescu (2012)
financial institutions experience the default explained that the CES quantifies each bank
altogether, systemic risk will appear as the contribution to the overall risk adding the
impact of this situation (Rodrigues-Moreno et capital weight into the analysis. Acharya et al.
al., 2010). (2012) explained that SRISK measured the
expected capital shortfall of an institution

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conditional on a crisis, using the size and risk measurements associated with the credit
leverage. risk and liquidity risk in four ASEAN banks.
Pierret (2015) had found the weakness
of SRISK was the assumption of Book Value (BV) LITERATURE REVIEW
of the debt that was not changed for about six Systemic Risk
months even more in the crisis period, in this Patro et al. (2013) assumed systemic risk
case, the result of the measurement would be as likelihood from previous systemic events or
useful just in short-term forecast. Banulescu financial system failures caused by systemic
and Dumitrescu (2012) mentioned that CES was events that have negatively impacted financial
developed from MES (Acharya et al., 2010) by markets and the economy. Separately, Lo
adding the capital weight into the analysis but (2008) explained that systemic risk is different
it still used the same main data source, i.e. from systemic failure. Systemic failure can
market return. Banulescu and Dumitrescu occur or is not based on the strength of the
(2012) claimed that CES was a hybrid measured event that triggers an increased risk, while
to catch Too Big Too Fail (TBTF) and Too systemic risk cannot be eliminated.
Interconnected Too Fail (TITF), where by using
MES (Acharya, 2010), Lestari (2015) found the The Factors Drivng Systemic Risk
same result. Lopez-Espinosa et al. (2012) found Credit Risk and Liquidity Risk
that dCoVaR was useful to catch contagion and Ahmad and Ariff (2007) examined credit
balance sheet deleveraging in the banking risks in developing countries during the crisis
system. Meanwhile, MES can be used to and they found that Indonesia, Malaysia and
measure the bank resilience to the systemic Thailand had 49%, 19%, and 48% of bad loans,
risk in the moderate level (Idier et al., 2013; respectively, which was calculated from the
Weiβ et al., 2014). Yun and Moon (2014) used ratio of non-performing loans to total loans.
dCoVaR and MES and found that the result of Credit risk can be served as a proxy for bank risk
the measurements were almost the same in taking behavior considering the high credit
term of cross-section dimension. This research ratio indicates aggressive behavior of banks
uses dCoVaR (Girardi and Ergun 2013) and MES which is an indication of bank risk-taking
(Acharya, 2010) to measure systemic risk based behavior (Hannan and Rhoades, 1987). On the
on two methods approached. other side, Adrian and Brunnermeier (2011)
The purpose of this research is to discuss found that maturity mismatch in the
the effect of credit risk and liquidity risk against commercial banks will lead on systemic risk.
systemic risk in the developing countries Maturity mismatch is the difference of asset
banking sector in four ASEAN banks (Indonesia, maturity and bank liability that make a bank
Malaysia, the Philippines, and Thailand). vulnerable to the higher risk (Ruprecht et al.,
Developing countries are vulnerable to the 2013).
crisis that happens in the developed countries
(Goldstein and Xie, 2009). Bank becomes the Competition and Bank Size
main financial source of private business sector Soedarmono et al. (2013) found that
in Asia countries so the bank stability in this competition and bank size caused systemic risk.
area becomes an important issue (Adams, It happened because in the high competition
2008). Moreover, the integration of ASEAN level, small and big banks compete to each
banks due to the ASEAN Economic Community other in order to exist in the market (Hakenes
in 2020 will increase the competition level and Schnabel, 2011). The higher competition
(Matousek, 2015). The main contribution of level is the higher risk is taken by the bank
this research lies on the usage of two systemic (Cubillas and Gonzales, 2014). Besides
competition, systemic risk can be affected by

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 JIAFE (Jurnal Ilmiah Akuntansi Fakultas Ekonomi) Vol. 4 No. 1, Juni 2018, Hal. 1-8
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bank size. Jonghe et al. (2015) claimed that (Acharya, 2010) defined as banks expected
combination of size and scope will give double equity loss when the market falls below 5%.
effect on systemic risk. It leads to the Too-Big-
Too-Fail (TBTF) issues where the bigger th bank Empirical Model
size is the bigger chance it has systemic risk 1. Delta Conditional Value at Risk (dCoVaR)
(Lestari, 2015). This research follows Ahmad and Ariff
(2007) to count credit risk as bad loans
GDP and Inflation percentage during three months or more to the
Weiß et al. (2014) measured systemic total loans, Yun and Moon (2014) to count
risk in terms of systemic event trigger factors liquidity risk as the ratio of total loans to total
during financial crisis period. The main results deposit, and Girardi and Ergun (2013) to count
were regulatory characteristics, GDP, and individual bank systemic risk by using dCoVaR.
inflation dominantly affected systemic risk Girardi and Ergun (2013) has described VaR
globally. bank i (i ≡ s is financial system) as q-th quantile
from return bank distribution bank i that
RESEARCH METHODOLOGY written by Rti :
Analysis Unit
Analysis unit in this research is the banks Pr ≤ , = (1)
listed in four ASEAN countries (Indonesia,
Malaysia, Philippines, and Thailand) during Then, dCoVaR i|jq,t is defined as q-th
2007-2013 periods. This research uses quantile from bank i return that is conditional
commercial banks regarding to its freedom in to bank j. dCoVaR i|jq,t can be described as VaR
doing business mix and facing the limited bank i that is conditional to market distress.
boundaries between countries (Soedarmono et Return bank i will be less than or equal to the
al., 2013). Banks without a complete data VaR value when the market distress happens.
needed (stock prices and annual financial
statements) for three consecutive years will be
excluded from the sample (Ariss, 2010). After Pr ≤ , ≤ , = (2)
filtering the banks data, there are 34 banks
listed in Indonesia and 11 banks are used, 10
banks in Malaysia and 8 banks are used, 14 Next, to count the percentage of
banks in the Philippines and 11 are used, and dCoVaR, market VaR that is conditional to the
10 banks in Thailand and 9 banks are used. The bencmark bank j deducted from market VaR
data is taken from Datastream Thomson that is conditional to distress. The percentage
Reuters. of dCoVaR is counted as:

Methodology
/
100 ( , − , )
This research used dCoVaR and MES as , = /
(3)
,
the model because dCoVaR can be used to
indentify systemic risk based on individual bank Conditional benchmark bank j bi can be defined
so it can catch TBTF and TITF issues (Bisias et as standard deviation from mean event:
al., 2012). This research follows Girardi and (µtj–σtj) ≤ Rtj ≤ (µtj + σtj) (4)
Ergun (2013) to measure dCoVaR that is
described as the difference between CoVaR where,
when the bank is in the distress period and the bi : Event when return bank j between µ–σ and
CoVaR in the normal period. Meanwhile, MES µ+σ, i.e. (µ–σ)≤R≤(µ+σ)

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µtj: Conditional mean bank j risk against systemic risk when the market is in
σtj: Standard deviation bank j distress based on this model:

2. Marginal Expected Shortfall (MES) MESi,t=α0+α1NPLi,t+α2LDRi,t+α3Sizei,t+α4GDPt+α5

This research follows Acharya (2010) to Compi,t+α5Inft+α6Indt+α7Malt+α8Thait+ei,t
count MES that is described as expected equity (7)
loss when the market falls below 5%.
where,
() − 1
"#$ %% = −# ' +,%%- (5)
MES i,t: MES bank i at t year
(* LDRi,t: Liquidity risk bank i at t year
NPLi,t:: Credit risk bank i at t year
"#$ %% = −# sizei,t: Size bank i at t year
where, GDPt: GDP at t year
() Compi,t: Competition bank i at t year
∶ 01234 5 46
(*
Infit: Inflation at t year
Indt: Country dummy at t year; Indonesia=1,
,%% ∶ " 3601 301234 ( 371 87
others=0
ei,t: Residual of the result
Panel Regression Model
RESULT AND DISCUSSION
1. Delta Conditional Value at Risk (dCoVaR)
Table 1. Shows the statistic description of
The first regression is done by using
the data
panel data to regress credit risk and liquidity
Mean Media Max Min
risk against systemic risk of individual bank Variabel
(%) n (%) (%) (%)
(dCoVaR) based on this model: dCoVaR 63.82 59.87 229.9 2.201
MES 2.837 3.023 7.264 0.061
dCoVaRi,t=α0+α1NPLi,t+α2LDRi,t+α3Sizei,t+α4GDPt
NPL 3.934 3.132 17.46 0.331
+α5Comi,t+α6Inft+α7Indt+α8Malt+α9Thait+α10Cris
LDR 94.04 95.18 211.2 31.44
t+ei,t (6)
Size 712.9 720.5 824.4 575.9
where, Com. 37.34 37.18 95.15 13.94
dCoVaRi,t: dCoVaR bank i at t year GDP 494.3 487.3 535.2 465.1
LDRi,t:: Liquidity risk bank i at t year Infl. 2.672 1.288 1.151 -1.109
NPLi,t: Credit risk bank i at t year Source: Self proceed
Sizei,t: Size bank i at t year
GDPt: GDP at t year Based on the dCoVaR calculation in Table
Compi,t: Competition bank i at t year 1., bank gives contribution to systemic risk for
Infit: Inflation at t year about 63% on the average. Meanwhile, based
Indt: Country dummy at t year; Indonesia=1, on the MES calculation, each bank gives almost
others=0 3% (on the average) contribution to systemic
Crist: Crisis dummy at t year; crisis (2007-2009) risk. Generally, based on the data after dCoVaR
= 1, others (2010-2013) = 0 is counted, it can be concluded that big banks
ei,t: Residual of the result in Indonesia, Philippine, and Thailand give
more contribution to systemic risk. This finding
2. Marginal Expected Shortfall (MES) is in agreement with another research finding
The second regression is done by using by Jonghe et al. (2015) that the big bank
panel data to regress credit risk and liquidity contribution to systemic risk is bigger than

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 JIAFE (Jurnal Ilmiah Akuntansi Fakultas Ekonomi) Vol. 4 No. 1, Juni 2018, Hal. 1-8
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small banks. On the other hand, from the means that if the banks in four ASEAN banks
output of dCoVaR, it is also known an are integrated in a single market area, the
interesting finding that small banks in Malaysia systemic risk will increase due to the crisis
give more contribution to systemic risk than big condition. Weiß et al. (2014) also found the
banks. Zebua (2010) explains that small banks same result that crisis gives an effect to
will be able to give a bigger effect to systemic systemic risk.
risk as the bank runs issue, especially in the Furthermore, it is also found that
crisis period. Indonesia and Thailand give contribution to
systemic risk in four ASEAN banks but GDP
The Effect of Credit Risk and Liquidity Risk gives a negative significant effect to systemic
against Systemic Risk of Individual Bank risk. It means that if the GDP decreases,
The purpose of this regression is to know systemic risk will increase. If the goods
the effect of credit risk and liquidity risk against production decreases, the business profit will
systemic risk of individual bank in four ASEAN also decrease. It may affect the credit payment
banks. The regression is done to answer the to the bank as the company usually borrows
first question of this research. money from the bank. Adams (2008) found that
bank was the main source of fund of the private
Table 2. The Effect of Credit Risk and Liquidity business sector in Asia. That is the reason why
Risk against Systemic Risk in Four ASEAN the bank stability becomes an important issue.
Banks
dCoVaR C T-Stat Prob. The Effect of Credit Risk and Liquidity Risk
against Bank Systemic Risk at the Market
C 2.642 4.230 0.000***
Distress
NPL 0.041 0.215 0.829
LDR 0.012 1.025 0.306
The second regression is done between
Size 0.013 1.18 0.238 credit risk and liquidity risk against systemic risk
Com. 0.037 1.37 0.171 at the market distress. It is in order to know the
GDP -0.508 -4.029 0.001*** effect of credit risk and liquidity risk against
Infl. 0.367 1.072 0.284 systemic risk especially under the market
Ind. 0.296 4.074 0.001*** distress condition.
Mal. 0.005 0.227 0.820
Thai. 0.082 0.023 0.004** Table 3. The Effect of Credit Risk and Liquidity
Crisis 0.054 3.144 0.002*** Risk Against Systemic Risk at the Market
Adj. R2 50% Distress in ASEAN-4 Banks
*** Significant level 1% ** Significant level MES C T-Stat Prob.
5%; *Significant level 10%
Source: Self proceed C 0.094 2.352 0.019
NPL 0.050 2.385 0.018**
LDR 0.007 2.424 0.016**
Based on the Table 2., it is known that
Size 0.020 13.14 0.000***
credit risk and liquidity risk do not affect Com. 0.005 1.535 0.125
systemic risk of individual bank. However, it is GDP -0.043 -5.558 0.000***
known that crisis gives a positive significant Infl. -0.093 -2.250 0.025**
effect to systemic risk at the 1% significant Ind. 0.035 7.331 0.000***
level. It is interesting because when the Mal. -0.037 -15.41 0.000***
regression is done for each country (for Thai. 0.003 1.074 0.284
additional analysis), only Indonesian banks Adj.R2 62%
showing that crisis affects systemic risk. It

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