Measuring Risk: Is it Necessary? An Empirical Study in Indonesian Banks

Abstract

Banks’ fundamental concept relies on public trust. Since banks are also called the fiduciary financial institutions, public trust plays as an important role in the banking industry. This is mainly due to the fact that banks do not actually manage their own money. Instead, banks manage public money. This may appear as the basic reasons on why banks are heavily controlled, and regulated by the government. Enforcements and necessary revisions should be done cautiously, as a result. Aside from regular monitoring and maintaining of the public trusts, banks are also managing the circulation of money. The process of granting loans, for instance, may have to be carefully monitored as well, to prevent non-payment of loans.

For this reason, this study attempts to analyze the management of risk in Indonesian banks, relying particularly from the commonly-prescribed indicators, such as; market risk, credit risk, and operational risk. These sets of indicators are analyzed to note the relational stimulus toward performance of publicly-listed banks in Indonesian Stock Exchange, or otherwise known as Bursa Efek Indonesia (“BEI”). It is expected that as banks are able to better manage their risks, performance swells.

Keywords: risk management, market risk, credit risk, operational risk, Indonesia, bank

JEL Classification: P47, P49, M40, M41, M20, M21, M10, l20, l21,G20, G21, G22