Government intervention, bank ownership and risk-taking during the Indonesian financial crisis

The 1997/98 financial crisis forced the Indonesian government to inject capital into selected banks, introduce deposit insurance and change capital requirements. This study investigates the relation between highly concentrated ownership and bank risk-taking using a sample of 52 insured private commercial Indonesian banks during the 1995–2003 period. For restructured banks, ownership concentration is positively related to overall risk, and negatively related to credit and liquidity risks, especially during the relaxed capital adequacy requirement period. Liquidity risk is reduced when the government and owners contribute additional capital, and credit risk is lowered as the government removes bad loans from problematic banks.