Excess Liquidity, Moral Hazard, and Credit Risk in Indonesian Commercial Banks
Downloads
This research investigates how liquidity creation induces moral hazard behavior and affects credit quality in Indonesian commercial banks. This study examines the effect of liquidity creation, liquidity risk, and central bank policies on credit risk in Indonesian commercial banks, proxied by the non-performing loan (NPL) ratio. Using panel data from 46 banks listed on the Indonesia Stock Exchange over 2015–2024, we apply the Two-Step System Generalized Method of Moments (SYS-GMM) to address endogeneity inherent in dynamic panel models. Results indicate that liquidity creation has a significant positive effect on NPL, consistent with the moral hazard hypothesis. Liquidity risk (LDR) also significantly and positively affects NPL. Reserve requirements (GWM) and BI-Rate do not produce a direct and significant effect on NPL. Return on assets (ROA) significantly and negatively affects NPL. These results suggest that credit risk in Indonesian commercial banking is predominantly influenced by bank-level intermediation behavior rather than by macroeconomic or policy variables. The research concludes that excess liquidity conditions incentivize aggressive credit expansion without proportionate attention to borrower quality, particularly in an oligopolistic market structure with implicit state guarantees.
Acharya, V., & Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366.
Alaoui Mdaghri, A. (2022). How does bank liquidity creation affect non-performing loans in the MENA region? International Journal of Emerging Markets, 17(7), 1635–1658.
Annas, M., Humairoh, H., & Endri, E. (2024). Macroeconomic and bank-specific factors on non-performing loan: evidence from an emerging economy. Calitatea, 25(199), 155–161.
Fungacova, Z., Turk, R., & Weill, L. (2021). High liquidity creation and bank failures. Journal of Financial Stability, 57, 100937.
Jiang, T., & Zheng, Y. (2024). Indicators of non-performing loan: does efficiency matter? Technological and Economic Development of Economy, 30(1), 129–147.
Le, T. D., & Pham, X. T. (2021). The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia-Pacific economies. Managerial Finance, 47(8), 1149–1167.
Long, X., Wang, Y., Zhang, J., & Liu, Z. (2022). Can central bank mitigate the effects of the COVID-19 pandemic on the macroeconomy? Emerging Markets Finance and Trade, 58(1), 1–16. https://doi.org/10.1080/1540496X.2021.1976354
Otoritas Jasa Keuangan. (2016). Peraturan Otoritas Jasa Keuangan Nomor 18 Tahun 2016 Tentang Penerapan Manajemen Risiko Bagi Bank Umum.
Otoritas Jasa Keuangan. (2024). Statistik Perbankan Indonesia Desember 2024. Jakarta: OJK.
Rahmadany, A. N., Risfandy, T., Achsanta, A. F., & Rifai, B. (2024). Liquidity and credit risks during the COVID-19 pandemic: evidence from a dual banking system. Journal of Islamic Accounting and Business Research.
Riani, R. (2021). Does COVID-19 Pandemic Affect Bank Credit Risk? A Panel Data Analysis. Ekonomi Islam Indonesia, 3(1).
Safitri, R., Andriana, I., & Sulastri, S. (2023). Determinants of Non-Performing Loans (NPL) in banking companies listed on the Indonesia Stock Exchange. International Journal of Economics, Business and Accounting Research (IJEBAR), 7(3), 1092–1098.
Saliba, C., Farmanesh, P., & Athari, S. A. (2023). Does country risk impact the banking sectors’ non-performing loans? Evidence from BRICS emerging economies. Financial Innovation, 9(1), 86.
Umar, M., & Sun, G. (2016). Non-performing loans (NPLs), liquidity creation, and moral hazard: Case of Chinese banks. China Finance and Economic Review, 4(1), 10.
Viverita, V., Bustaman, Y., & Danarsari, D. N. (2023). Liquidity creation by Islamic and conventional banks during the Covid-19 pandemic. Heliyon. https://doi.org/10.1016/j.heliyon.2023.e15136
Vuong, N. T. P., Hoang, T. H. V., & Ha, D. T. T. (2023). Liquidity creation and bank risk-taking: Evidence from a transition market. Cogent Economics & Finance, 11(1), 2199904.
Yudaruddin, R., et al. (2024). Liquidity and credit risk in Indonesia: The role of FinTech development. SAGE Open. doi:10.1177/21582440241245248.
Zheng, Y., Cheung, A., & Cronje, T. (2019). The moderating role of capital on the relationship between bank liquidity creation and failure risk. Journal of International Financial Markets, Institutions and Money, 63, 101137.
Zuhri, S. (2024). Analysis of the banking industry in Indonesia through the Structure-Conduct-Performance approach. Journal of Economics Research and Policy Studies, 4(2), 314–329.
Copyright (c) 2026 Jeffry Fauzan, Dewi Hanggraeni
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
