ESTIMATING A JOINT PROBABILITY OF DEFAULT INDEX FOR INDONESIAN BANKS: A COPULA APPROACH

ESTIMATING A JOINT PROBABILITY OF DEFAULT INDEX FOR INDONESIAN BANKS: A COPULA APPROACH

Zaafri Ananto Husodo, Sigit Sulistyo Wibowo, Muhammad Budi Prasetyo, Usman Arief, Maulana Harris Muhajir

We develop a joint default probability index to signal potential systemic risks in the highly concentrated Indonesian banking industry. To build the index, we estimate bank-level tail risks using monthly bank financial reports. We use the copula approach to derive the joint multivariate dependencies at the bank level, as reflected in the monthly financial reports. Our results, which are based on a sample of 104 banks from December 2003 to April 2020, show joint multivariate dependencies at the bank level suggesting that the standard univariate normal distribution is unsuitable for capturing tail risks of individual banks. Our index accurately captures the global financial crisis of 2007-2008 indicating that it is a valid joint default probability index. Further, our index also signaled a higher degree of joint default before the COVID-19 outbreak in 2020, suggesting that it is a good indicator of potential systemic risk in the economy.

2020

systemic risk, financial system, Pair copula construction, copula

10.21098/bemp.v23i3.1358

Bulletin Ekonomi Moneter dan Perbankan

Bank Indonesia

Finance