THE IMPACT OF MARKET DISCIPLINE ON BANKS’ BEHAVIOR: EMPIRICAL EVIDENCE FROM INDONESIA

Abstract

This  study  aims  to  investigate  the  influence  of  market  discipline  on  the  behavior  of commercial banks with respect to their capital adequacy compliance and pricing behavior. We used panel data of listed commercial banks in Indonesia Stock Exchange in the year of 2007-2012. We used capital adequacy and pricing behavior as the dependent variable and we included  size  of  bank,  deposits,  liquidity  risk,  asset  quality  and  profitability  as  the explanatory variables and type of ownerships as dummy variable.  The findings indicate that bank size, liquidity risk, profitability, market discipline and type of ownership significantly effect on the bank capital adequacy. It showed that state-owned banks are percieved more secure  than  private-owned  banks  due  to  state-owned  banks  maintain  superior  capital adequacy.  On  the  other  edge,  deposits,  liquidity  risk,  market  discipline  and  type  of ownership effect on banks  pricing behavior. According to type of ownership, state-owned banks earn higher net interest margin than private-owned banks due to state-owned banks set lower deposits rate and higher loans rate.

Keywords: market discipline, capital adequacy, interest margin, bank behavior