Analyze On Systematic Risk Contagion In Interbank Market Of Indonesia

Banking institutions work as a credit intermediary in financial market, remain a core component of the world economy. Considering the reasons such as:meeting the short-term liquidity, receiving short-term profit of idle funds and etc. The inter-bank lending form a complex obligatory relationships between banks, and forming the risks which can crossing the third party transfer directly. That means the failure of a single bank, its claims banks suffer losses because of its default, thereby the soundness of whole banking system and even the financial sector may be affected. This paper bases on this premise, and use the data from Indonesia which has closed relationship with China, to explore the risk contagion effect of Indonesia banking industry.This paper selected inter-bank lending data from 36 listed banks in Indonesia of the year 2010-2014, using matrix method simulate the risk contagion in inter-bank market of Indonesia, combing with the improving risk infection criteria of "Basel III" for the capital requirement, to estimate the effect of the risk contagion in inter-bank market of Indonesia. Finally, from the aspects of banks contagion effect, the number of risks contagion, the asset of the infected banks and the capital loss of infected banks, draw the following conclusions:(1) The effect of systemic risk contagion in the Indonesian inter-bank market is not obvious, the banking system is robust.(2) During the simulation process of the risk contagion, there are only BBRI and BMRI have contagion effect, and both of them are state-owned banks in Indonesia; And during the risk contagion process, the maximum round of contagion is two rounds, and cause the most banks to be failure are three banks;(3) From aspect of risk contagion, the total asset ratio and capital loss ratio of default banks account for banking system in Indonesia, the proportion of total asset which affected banks account for whole banking system in Indonesia is 2.12%, compared to 77% which is the proportion of total asset of sample banks account for the whole banking system, it is a small proportion. The maximum causing capital loss ratio is 16.95%, which is not enough to cause a massive of bank defaults.Base on the empirical research, this paper analyzes the reason why the banking system of Indonesian is soundness. Mainly the following:the strict capital entry barriers; higher capital adequacy ratio; diversify external regulation measures; Systematic crisis management protocol; perfect exit mechanism for banks.Finally, the paper gets some inspiration:First, according to the rating of the bank’s risk assets, implement the differentiated capital regulation; Second, to strengthen the identification of systemically important banks, and develop specific regulatory policies and crisis contingency plans; Third, establishing a good communication mechanism among the banks; Fourth, improving the agreement of crisis management and exit mechanism for banks.