Economic freedom on bank stability and risk-taking in emerging economy: Indonesian case study

Figures & data

Figure 1. Economic freedom index of Indonesia and the rest of the World source: compiled from heritage foundation index (www.heritage.org/index/).

Table 1. Descriptive statistics

Variables	Measure	Obs	Mean	Std. Dev	Min.	Max
Dependent Variables
ZSCORE	ZSCORE = (MROA + EQTA)/SDROA; MROA represents the average value of the return on assets; EQTA is the ratio of total equity to total assets, SDROA is the standard deviation of the return-to-assets ratio	1626	19.0857	14.1737	−3.6931	149.205
NPL	Bank non-performing loans to gross loans	1543	3.0085	3.4336	0.02	51
LLPL	LLPL is Loan Loss Provision to Total Loan	1593	0.0248	0.0289	3.84e-06	0.4755
Independent Variables
EF	Index of Economic Freedom employed, which is measured on a scale from 0 to 100	1626	56.1102	3.5055	51.9	64.2
Control Variables
CR5	5-firm concentration ratio in the banking sector	1626	49.8919	1.9131	47.1319	55.0725
SIZE	Natural logarithm of total assets	1626	15.6966	1.8653	9.8752	20.9336
CTI	Ratio of total cost to total income	1626	0.8229	0.2913	0.2574	5.4568
DEPO	The ratio of total banks’ third-party funds to total assets	1626	0.7016	0.1707	0.0393	0.9615
LTA	The ratio of loans to total assets	1620	0.5939	0.1517	0.0054	0.9310
NON	The ratio of non-interest income to total assets	1626	0.0199	0.0509	0.0001	0.9779

Table 2. Correlation Matrix

Variables	ZEQTA	NPL	LLPL	EF	CR5	SIZE	CTI	DEPO	LTA	NON
ZEQTA	1.0000
NPL	−0.2189	1.0000
LLPL	−0.1633	0.7729	1.0000
EF	0.1286	−0.1191	−0.1590	1.0000
CR5	−0.0213	0.1729	0.2404	−0.1720	1.0000
SIZE	0.0243	−0.0180	0.0477	0.3855	−0.1727	1.0000
CTI	−0.0868	0.1463	0.0254	0.1297	−0.0069	−0.1030	1.0000
DEPO	−0.0233	−0.0301	−0.1331	−0.1718	0.0475	−0.0385	0.1093	1.0000
LTA	0.0249	−0.0948	−0.2256	0.2494	−0.1883	0.0900	0.0199	0.0172	1.0000
NON	−0.1404	0.0461	0.0971	0.1532	−0.0225	0.2556	−0.0001	−0.2442	−0.0853	1.0000

Table 3. The impact of economic freedom on bank stability-main regression

Expl. variables	Dependent variables
	ZEQTA		NPL
	(1)	(2)	(3)	(4)
VAR L1.	0.7320*** (0.0647	0.7332*** (0.0641)	0.5668*** (0.0280)	0.5681*** (0.0280)
EF	0.1421** (0.0667)		−0.0598** (0.0252)
EF L1.		0.1598** (0.0783)		−0.0608* (0.0309)
CR5	−0.1152 (0.1188)	−0.0904 (0.1137)	0.2019*** (0.0409)	0.1884*** (0.0389)
SIZE	−0.1923 (0.2428)	−0.1967 (0.2393)	0.0467 (0.0518)	0.0401 (0.0523)
CTI	−1.5425** (0.6376)	−1.5441* (0.6476)	1.5445** (0.7475)	1.5269** (0.7511)
DEPO	−2.8335 (2.2855)	−2.9252 (2.2801)	0.0035 (0.5512)	0.0405** (0.5472)
LTA	−0.7007 (1.6488)	−0.6445 (1.6472)	1.0913 (0.8039)	1.0409 (0.8033)
NON	−8.1889** (4.1013)	−8.2158** (4.0101)	−0.5506 (1.4724)	−0.5564 (1.4703)
Constanta	9.8644 (8.1119)	7.8531 (7.9009)	−8.1137*** (1.7113)	−7.3243*** (1.5898)
Observations	1496	1496	1400	1400
Number of banks	124	124	123	123
AR(2) test	0.304	0.285	0.107	0.121
Hansen-J test	0.232	0.245	0.263	0.262

Sources and notes: Authors’ calculation. ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively. Standard errors of each coefficient are in parentheses.

Table 4. The impact of economic freedom on bank stability—government vs private

Expl. variables	Government		Private
	ZEQTA	NPL	ZEQTA	NPL
	(5)	(6)	(7)	(8)
VAR L1.	0.4136*** (0.0895)	0.7180*** (0.0589)	0.7363*** (0.0673)	0.4555*** (0.0626)
EF	0.0886 (0.1687)	−0.0820 (0.0499)	0.1731** (0.0784)	−0.0470* (0.0254)
CR5	0.0514* (0.1160)	0.1276* (0.0729)	−0.1430 (0.1615)	0.2551*** (0.0415)
SIZE	0.4731 (0.4748)	0.1119 (0.1138)	−0.3212 (0.3200)	0.0048 (0.0639)
CTI	−1.9086 (1.7808)	0.9715 (2.6705)	−1.7278* (0.9409)	1.3726** (0.6299)
DEPO	−5.9030 (5.2442)	0.5638 (1.5495)	−2.0657 (2.5078)	−0.1802 (0.6975)
LTA	8.0369** (3.2661)	2.3360 (2.1346)	−2.6564 (2.1466)	1.1896* (0.6532)
NON	−71.9033 (59.5402)	−43.8933 (46.3665)	−8.3343** (3.6375)	0.6436 (1.8665)
Constanta	−3.3950 (10.1531)	−4.9311 (4.2432)	12.2632 (10.808)	−10.324*** (1.9991)
Observations	414	410	1082	990
Number of banks	31	31	95	94
AR(2) test	0.073	0.578	0.368	0.340
Hansen-J test	0.079	0.179	0.850	0.922

Sources and notes: Authors’ calculation. ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively. Standard errors of each coefficient are in parentheses.

Table 5. The impact of economic freedom on bank stability—small vs large

Expl. variables	Small		Large
	ZEQTA	NPL	ZEQTA	NPL
	(9)	(10)	(11)	(12)
VAR L1.	0.5431*** (0.0770)	0.4654*** (0.0589)	0.7989*** (0.0901)	0.5555*** (0.0374)
EF	0.4359*** (0.1168)	0.0042 (0.0394)	0.1213 (0.0889)	−0.0592** (0.0267)
CR5	−0.0936 (0.2138)	0.1802*** (0.0398)	−0.0733 (0.1569)	0.1376*** (0.0487)
SIZE	−1.4337*** (0.4029)	−0.0943 (0.1295)	−0.2172 (0.3789)	0.0583 (0.0523)
CTI	−2.6553** (1.1999)	0.8542 (1.4283)	−1.1370 (1.1125)	1.1376* (0.6583)
DEPO	−6.9773** (3.3577)	0.1545 (1.2185)	1.2715 (2.1243)	−0.4000 (0.5965)
LTA	−0.8003 (2.2482)	0.1448 (0.8112)	1.1591 (2.2529)	−0.0594 (0.8575)
NON	−16.5470 (10.3115)	18.2150 (17.7369)	−4.0653 (5.2080)	−2.6274 (1.6235)
Constanta	18.0156 (13.6856)	−7.5968** (3.0733)	4.1048 (10.8058)	−3.7057* (1.8825)
Observations	764	709	732	691
Number of banks	99	96	89	86
AR(2) test	0.308	0.514	0.241	0.347
Hansen-J test	0.971	0.407	0.906	0.961

Sources and notes: Authors’ calculation. ***, **, and * indicate signficance at the 1%, 5%, and 10%, respectively. Standard errors of each coefficient are in parentheses.

Table 6. The impact of economic freedom on bank stability—control for global financial crisis

Expl. variables	Dependent variables
	ZEQTA		NPL
	(13)	(14)	(15)	(16)
VAR L1.	0.7306*** (0.0658)	0.7331*** (0.0651)	0.5660*** (0.0288)	0.5696*** (0.0286)
EF	0.2120** (0.0840)		−0.0610** (0.0237)
EF L1.		0.2141** (0.0898)		−0.0562** (0.0287)
CR5	−0.2812* (0.1419)	−0.2131* (0.1237)	0.1978*** (0.0542)	0.1733** (0.0520)
SIZE	−0.2133 (0.2503)	−0.2117 (0.2422)	0.0523 (0.0524)	0.0413 (0.0516)
CTI	−1.5140** (0.6671)	−1.5082** (0.6530)	1.5530** (0.7457)	1.5289 (0.7481)
DEPO	−2.5713 (2.2699)	−2.7227 (2.3008)	−0.0732 (0.5499)	−0.0079 (0.5458)
LTA	−1.1658 (1.7496)	−0.9579 (1.7117)	1.0718 (0.7689)	0.9909 (0.7659)
NON	−8.2712** (4.1132)	−8.1817** (3.9847)	−0.5874 (1.4713)	−0.6274 (1.4651)
CRISIS	1.4046*** (0.5303)	1.1312** (4.4698)	0.0383 (0.2934)	0.1302 (0.2848)
Constanta	14.3615 (8.7470)	10.9922 (8.0804)	−7.8807*** (2.1142)	−6.8131*** (2.0350)
Observations	1496	1496	1400	1400
Number of banks	124	124	123	123
AR(2) test	0.304	0.279	0.105	0.110
Hansen-J test	0.223	0.238	0.266	0.266

Sources and notes: Authors’ calculation. The global financial crisis is a dummy variable equal to 1 for financial crisis period (2008–2009) and 0 otherwise. ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively. Standard errors of each coefficient are in parentheses.

Table 7. The impact of economic freedom on bank stability—fixed effect and random effect

Expl. variables	Dependent variables
	ZEQTA		NPL
	FE	RE	FE	RE
	(17)	(18)	(19)	(20)
VAR L1.	0.4705*** (0.0207)	0. 8594 *** (0. 0127)	0.4157*** (0.0235)	0.5389*** (0.0198)
EF	0.4271*** (0.0772)	0. 0794 (0. 0535)	−0.0174 (0.0368)	−0.0654*** (0.0219)
CR5	−0.2182** (0.1089)	−0. 1664 (0. 1196)	0.2296*** (0.0521)	0.2118*** (0.0496)
SIZE	−0.7783*** (0.3357)	−0. 1222 (0. 1112)	−0.3244* (0.1723)	0.0637 (0.0482)
CTI	−0.6013** (0.6407)	−0. 2229* (0. 6479)	1.3454*** (0.2945)	1.5607*** (0.2679)
DEPO	−0.1917*** (0.5342)	−0. 177** (0. 1003)	−0.0233 (0.7537)	0.0140 (0.5021)
LTA	−0.1384 (0.4283)	−0. 6060 (0. 2285)	1.4279** (0.7186)	1.1027* (0.5694)
NON	−0.7057 (0.4786)	−0. 2029 (0. 3653)	−4.3631* (2.5623)	−0.8678 (2.1307)
Constanta	0.778*** (0.4425)	0. 6162* (0. 3299)	−5.4681* (3.2348)	−8.5041*** (2.6356)
Observations	1496	1496	1400	1400
Number of banks	124	124	123	123
Prob > F	0.0000	0.0000	0.0000	0.0000
R^2within	0.4599	0.3935	0.2588	0.2518
R^2between	0.6933	0.9741	0.4842	0.6899
R^2overall	0.5783	0.8140	0.3869	0.4650

Sources and notes: Authors’ calculation. ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively. Standard errors of each coefficient are in parentheses.

Table 8. The impact of economic freedom on bank stability-—loan loss provision to loan

Expl. variables	Dependent variables: LLPL
	(21)	(22)	(23)	(24)
VAR L1.	0.4629*** (0.0857)	0.4610*** (0.0873)	0.4636*** (0.0900)	0.4630*** (0.0909)
EF	−0.0007*** (0.0002)		−0.0007*** (0.0003)
EF L1.		−0.0008* (0.0783)		−0.0008*** (0.0004)
CR5	−0.0020*** (0.0004)	0.0019*** (0.0004)	0.0019*** (0.0006)	0.0017*** (0.0005)
SIZE	0.0018*** (0.0004)	0.0018*** (0.0004)	0.0018*** (0.0004)	0.0018*** (0.0004)
CTI	0.0132* (0.0069)	0.0131* (0.0069)	0.0132** (0.0069)	0.0131** (0.0069)
DEPO	0.0073 (0.0056)	−0.0074 (0.0056)	−0.0074*** (0.0058)	−0.0073*** (0.0058)
LTA	−0.0034 (0.0083)	−0.0036 (0.0081)	−0.0036*** (0.0076)	−0.0039*** (0.0076)
NON	−0.0015 (0.0172)	−0.0011 (0.0175)	−0.0018*** (0.0174)	−0.0017*** (0.0178)
CRISIS			0.0006*** (0.0027)	0.0014*** (0.0026)
Constanta	−0.0811*** (0.01727)	−0.0679*** (7.0147)	−0.0782* (0.0194)	−0.0634* (0.0147)
Observations	1466	1466	1466	1466
Number of banks	124	124	124	124
AR(2) test	0.687	0.675	0.689	0.678
Hansen-J test	0.834	0.308	0.298	0.321

Sources and notes: Authors’ calculation. LLPL is Loan Loss Provision to Total Loan ***, **, and * indicate significance at the 1%, 5%, and 10%, respectively. Standard errors of each coefficient are in parentheses.