Academic journal article Researchers World

Implementing the Banking Sector Soundness Index (Bss) for Predicting Banking Crisis

Academic journal article Researchers World

Implementing the Banking Sector Soundness Index (Bss) for Predicting Banking Crisis

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Banks are financial intermediaries which play an important role in the economy. Lately, economic condition in ASEAN countries, on average, decreases compared with countries in the Europe and the United States. Data Outlook World Development Indicator (WDI), in 2015, there is a summary of the movement of the economic growth during 2009-2014. In 2010, the real income changes in both the countries of ASEAN, Europe and United States are both experiencing a decline, then fluctuate. However, in 2013, when the countries in the Europe and the US had increased, only the ASEAN countries were experiencing a decline. Economic activity in developed and developing countries in East Asia such as Korea, Taiwan, and ASEAN countries showed a slight economic slowdown than expected, this is reflected by weak exports and declining domestic demand.

The Early Warning System (EWS) crisis has done a lot of research by some experts for anticipation that the crisis could have been handled since the beginning of the emergence of indications of a crisis. EWS is using a variety of methods that are considered suitable for research. The aim of this paper is to anticipate the arrival of the crisis early so that the country can set up a variety of policies to reduce the impact of the crisis.

Bank Sharia remains more resistant to the crisis than conventional banks because Islamic banking system in the free activity of usury. Fahmi (2015; 43) defines usury is the addition in a way that is not fair. Conventional banks rated not support real growth in the overall economy because the real sector is considered to have a substantial risk, whereas if the money deposited in the bank it will benefit in the form of interest.

Based on the reason previously, we formulate the hypothesis as follows: whether economic growth, capital (CAR), asset quality (LAR) and earnings (ROA) exhibited negative effect, while inflation, the ratio of money supply, exchange rate, management (MAN), liquidity (FDR) and sensitivity to market Risk (SEN) exhibited positive effect towards the prediction of Islamic Banking crisis in ASEAN in 2010-2014.


The Theory of crisis:

In the theory of the financial crisis, Ascarya (2009) mentioned that conventional economic generally looked a macro perspective, developed from the first generation model, the second generation model, and the third generation model.

> First generation Model

The model looked at the financial crisis which arise from a currency crisis or balance of payment crisis, macroeconomic imbalances because of weak economic fundamentals. This approach tends assuming central bank financing of fiscal deficit through the provision of credit in the country and also maintain a fixed exchange rate. This model can't explain the Asian financial crisis in which despite healthy economic fundamentals, these countries are still experiencing a crisis. This model was first proposed by Krugman (1979) and Flood and Garber (1984).

> Second Generation Model

This model was developed by the weakness of first generation model and propose the central role of expectations and a failure of coordination between lenders, so the crisis can occur regardless of the health of economic fundamentals. This model was first proposed by Obstfeld and Rogoff (1986).

> Third Generation Model

Krugman (1997) and Corsetti et al. (1998) stated that thereis influence of moral hazard on the third generation currency crisis. The third generation model emphasizes on the balance sheet effects associated with the devaluation. The basic idea is banks and companies in developing countries have explicit currency mismatches in their balance sheets as they do foreign currency loans and to lend in local currency. If there is a specific currency depreciation will lead therefore emphasizes the third generation model of banking supervision tightened. …

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