Off-Balance Sheet Derivatives and Banking Risk: Indonesian Evidence
33 Pages Posted: 20 Aug 2015 Last revised: 17 Feb 2017
Date Written: August 16, 2015
In modern banking, off-balance sheet (OBS) activity has played a greater role in banking business following rapid technological advancement and some regulatory development. Even though OBS activity has given birth to some new business prospects, appropriate risk measurement needs to be assessed to know the risk entailed in this activity. In this paper, we examine how OBS derivatives affected the risk profile of both large as well as medium and small banks in Indonesia throughout 2010-2014. We use two risk definitions for our empirical examination, i.e. institutional bank’s total risk and systematic risk. Our findings reveal that the impacts of OBS derivatives on Indonesian banking sector vary depending on the bank size. OBS derivatives reduce total risk and systematic risk of large banking firms. For small and medium banks, nonetheless, they increase both of total and systematic risks.
Keywords: bank risk, off balance sheet, derivative transactions
JEL Classification: C23, C26, G21, G28
Suggested Citation: Suggested Citation