Stability Measurement of Dual Banking System in Indonesia: Markov Switching Approach

Abstract

Various macro and micro economic shocks that occur during this time suggest the potential of financial instability. This study attempts to analyze the influence of macro and micro economic variables of the dual banking stability in Indonesia and compares the stability level of both banking system by using two comparative stability measurement models namely the Z-score and Banking Stability Index. The macro variables used in this study include Industrial Product Index, Inflation, Exchange Rate, and BI Rate. While the micro variables are deposits, Capital Adequacy Ratio, Financing to Deposit Ratio and the Interbank Money Market. Then, the method used in this is a Markov Switching VAR. The results of this study described through two analyzes: (1) The calculation index of financial stability with Z-score and BSI, and (2) Results of Markov Switching, proves that the sharia banking system has a higher level of stability compared to the conventional banking system. It means sharia banking is more stable than conventional ones.DOI: 10.15408/aiq.v10i1.5867