Using Earnings-at-Risk to Assess the Risk of Indonesian Banks

Using Earnings-at-Risk to Assess the Risk of Indonesian Banks

Elisa R. Muresan, Ph.D. 1 Nevi Danila, Ph.D. 2

JEL Classifications: F37, G20 Authors’ Keywords: Capital Adequacy Ratio (CAR) Earnings-at-Risk (EaR), Bank Risk, Indonesian Banks
Questions and feedback may be directed to both authors.
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Elisa R. Muresan is an Assistant Professor of Finance at The School of Business, Public Administration, and Information Sciences, Long Island University, 1 University Plaza, Brooklyn, NY 11201, USA. Tel. +1 – 718 – 488 1150, Fax. +1 – 718 – 488 1125, Email: [e-mail] Nevi Danila is the President of the Malangkuçeçwara School of Economics, Jl. Terusan Kalasan - Malang 65142, Jawa Timur (East Java), Indonesia. Tel. + 62 – 341 – 491813, Fax: + 62 – 341 – 495619, Email: [e-mail]

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Using Earnings-at-Risk to Assess the Risk of Indonesian Banks

ABSTRACT The implication of Asian Crises in 1997-1998 has been detrimental to many financial institutions in the Asia-Pacific region. Most severely, followed by political reformation throughout 1998 to 2000, almost all of approximately 250 banks registered in the Indonesian Central Bank (Bank Indonesia) database had to undergo major financial reformations, merged with other banks, or simply had to be liquidated. The CAR Methodology, which has been used as the main tool by Bank Indonesia to investigate and estimate the riskiness of Indonesian banks, was not able to accurately estimate the risk of these banks. In this paper, we provide a theoretical framework and empirical analysis on the potential use of Earnings-at-Risk (EaR) to complement the current risk assessment methods used for the Indonesian banks.

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INTRODUCTION
Asian Crises in 1998 have brought down many financial institutions in the South East Asian Nations to their lowest point of loss from their highest peak of glory during the Asian Tigers Economic period in the 1990s. More specifically in Indonesia, within 2 years (1998 –

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