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

Abstract

This paper examines the effect of economic freedoms on financial stability across banking industry in Indonesia. Using unbalanced panel data of Indonesian banks, the effect of economic freedom to financial stability is estimated using GMM approach covering the period of analysis from 2004 to 2018. The analysis is conducted by regression. The main model of economic freedom on financial stability is measured by ZSCORE and NPL, which include all sample banks in the first stage. This study also explores the effect base on different ownership type and size of the bank in the second and third stage, respectively. In addition, concentration ratio, bank size, efficiency, liquidity, and business diversification are included as control variables. The results indicate that economic freedom statistically has a positive and significant effect on financial stability as measured by ZSCORE. However, measurements with NPL showed dissimilar results. The findings have considerable implications for economic literature and policy practice.

Keywords

• economic freedom
• financial stability
• bank
• economics
• ZSCORE