The impact of financial and competition conglomeration policies on banking efficiency and risk in Indonesia

Abstract

Financial conglomerates and bank competition play a significant role in developing efficiency levels and increased risk exposure. This study aims to formulate a conceptual model of the policy’s impact of financial conglomerates and bank competition on bank efficiency and stability risk. This research is conducted using data samples from 90 commercial banks in Indonesia from 2010 to 2017. The empirical analysis is carried out using the dynamic data panel or Generalized Method of Moments (GMM). The study results show that policies of financial conglomerates and competition have a positive effect on banking efficiency. These results support previous empirical studies, where financial conglomeration, in general, can improve banking efficiency. Furthermore, it is found that the interaction between financial conglomerates and competition has a positive effect on banking stability. The implication of this research shows that the potential risks that cause distortion become irrelevant when the banking structure is more competitive. Furthermore, this study recommends the need to build the ideal financial conglomerate institutional structure to strengthen and encourage the role of more competitive banks.