SUD ON EARL WARNING INDICAORS OF BANK RUNS IN INDONESIA: MARKOV-SWICHING APPROACH Ikandar Simorangkir * Abrac A run on a bank occur when a large number of deoior fearing ha heir bank will be unable o rea heir deoi in full and on ime imulaneoul r o wihdraw heir fund immediael. A run on a aricular bank can lead o a banking crii if i read o oher bank (conagiou effec). Bank run and banking crie have become a global henomenon and have occurred reeaedl in man counrie ince he era of modern banking. In he cae of Indoneia bank run have alo reoccurred ime and again. In 99 bank run affeced everal naional bank ubequenl reciiaing he liquidaion of one bank. hen in 997/998 bank run develoed ino he wor banking crii ever wineed in he banking hior of Indoneia. Conidering he een of loe aribuable o bank run and he banking crii eenive udie on he earl warning indicaor of bank run are urgenl required o reven fuure bank run and banking crie. hi aer aim o comrehenivel anale he earl warning indicaor of bank run for all bank in Indoneia boh during he amle eriod of 990-005 a well a during he banking crii in 997-998. he ud of earl warning indicaor of bank run ue he Markov-Swiching model. o calculae he raniion robabili from a ranquil ae o a ae of bank run ue he Markov-Swiching roce hrough an auo-regreive aroach. he change in deoi held a each bank i ued a a variable of bank run. he reul of Markov-Swiching (MS) how ha he MS model i robu a an earl warning indicaor of bank run. hi i refleced b eing which wa erformed on he acual inciden of 0 bank howing ha he MS model onl roduced fale ignal an eimaed 0.69% -.08% of he ime. JEL Claificaion: C G Keword: Bank Run Earl Warning Indicaor Markov-Swiching * Direcor of Economic Reearch Grou a Bank Indoneia Cenal Bank of Reublic Indoneia and Lecurer a MM Graduae School Univeri of Pelia Haraan Jakara Indoneia. he aer will be reened a he Inernaional Conference on Economic Modelling-Ecomod0 Seville Sain on Jul 4-6 0. I would like o hank Profeor Ruam Didong Dr. Muliaman D. Hadad and Dr. Sugiharo Safuan for valuable commen. he view ereed in hi Paer are hoe of he auhor and do no necearil rereen hoe of BI or BI olic.
. Inroducion Bank run occur a a reul of bank fragili o cuomer wihdrawal. Such fragili em from he buine acivi of a bank which ranform hor-erm liabiliie like checking accoun aving and erm deoi ino longer-erm ae like loan. Accordingl bank are coninuoul faced wih he roblem of a mauri mimach and are hereb vulnerable o large-cale wihdrawal (bank run) b heir cuomer due o limied cuomer ownerhi of liquid ae. A bank run i oenibl riggered b a lo of ublic confidence in a bank. hi lo of confidence can em from inernal bank facor like a decline in erformance a well a oher facor like an economic downurn or eernaliie like conagion. Emirical eerience demonrae ha bank run can everel undermine he econom of he affeced counr in aricular if a banking crii alo emerge. Banking crie ha develo from bank run lead o a break in he bank inermediaion funcion hereb urging he buine communi of i financing ource. When financing ource dr u i can ell he end for buine acivi and roducion and ulimael lead o an economic lowdown or conracion a well a increaed unemlomen. Ficall a banking crii will eacerbae he co of recover o ave he affeced bank. Furhermore hi co of recover i ulimael borne b he aaer. Crii eerience gleaned in Aia during 997/998 indicae ha i wa a banking crii a one of he rimar facor cauing counrie in he region o uffer a evere economic conracion. he Indoneian econom eerienced he deee conracion reaching 3.% in 998. Meanwhile he economie of hailand Malaia Souh Korea and he Philiine eerienced reecive conracion in he ame ear of 0.5% 7.4% 6.9% and 0.6%. In addiion he co of rerucuring he banking ecor during he crii reached a whoing 45% of gro domeic roduc in Indoneia 5% in Korea and % in Malaia (Lindgren e. all. 999). Conidering ha bank run can occur ime and again and heir imac can rigger ignifican economic loe an in-deh review of earl warning indicaor o reven he occurrence of bank run i imel and erinen. In general hi reearch aer on earl warning indicaor (EWI) uilie wo main model namel a ignal eracion model and an economeric model.
he ignal eracion model ue a non-arameric aroach b oberving he behaviour of aricular variable before and afer a crii. he mo commonl cied model ued a a reference in he reearch wa develoed b Kamink (998 999) for earl warning indicaor of an echange rae crii and banking crii a well a he model develoed b Kamink Lizondo and Reinhar (998) a an EWI for an echange rae crii. Anoher e of model ued o deec banking crie i an economeric model one of which i he logi model. Demirgüç-Kun and Deragiache (998) uilied a logi model o deec banking crie. In he reearch he oibili of a crii wa aumed a a funcion of he elanaor variable vecor wih he value of he deenden variable equal o 0 for no crii and in he even of a crii. Several auhor have conduced udie on earl warning indicaor for he financial ecor in Indoneia. Reearch underaken b Agung e al. (003) and Dewai e al. (004) dicu earl warning indicaor for an echange rae crii and financial crii in Indoneia uing he ignal aroach. hi aroach conain a number of inheren weaknee rimaril relaing o he arbirar deerminaion of he crii hrehold value and crii ime frame. Reearch conduced b Bank Indoneia (003a 003b and 003c) reviewed an EWI for financial em abili uing dicriminan anali and a logiic regreion bu he reearch did no cover bank run. Bank Indoneia (004a) alo udied a bankruc redicion model for commercial bank in Indoneia uing facor anali and logiic regreion however bank run were no menioned. Again hi raher are backdro hi aer rive o develo earl warning indicaor o deec he oibili of individual bank run uing he Markov-Swiching model. Afer he Inroducion hi aer dicue he heoreical foundaion and emirical reul of reviou reearch. he ubequen ecion ouline a icure of naional bank erformance under crii condiion and he emirical model ued. he fourh ar of he aer reen he emirical reul followed in he final ecion wih he concluion and recommendaion o reven furher bank run. 3
. Bank Run and Earl Warning Indicaor Numerou earl warning indicaor (EWI) for individual bank were develoed uing reliminar emirical review in he mid-970. Reearch b Gonzalez-Hermoillo (999) oulaed ha he collae of a bank i caued b liquidi condiion he marke or credi rik. hee hree facor are cerainl affeced b he characeriic of an individual bank a well a macroeconomic condiion. In order o caure he imac of differen effec Gonzalez- Hermoillo (999) develoed a regreion model uing everal banking indicaor (like a ro of marke rik credi rik liquidi rik and moral hazard) in conuncion wih macroeconomic and regional variable. he reearch alo elicil inveigae how he collae of an individual bank can be affeced b financial ecor vulnerabiliie a a whole (for inance wih he conideraion of conagion). Secificall he reearch include a raio of oal credi o ouu a a meaure of banking ecor vulnerabili in a regreion. Congruou wih reearch conduced b he US Federal Deoi Inurance Cororaion (FDIC) in i earl warning indicaor em Gonzalez-Hermoillo (999) differeniaed beween indicaor of vulnerabili emming from rik facor ha can caue a bank o collae. In general an increae in non-erforming loan and a dro in he caial adequac raio are good indicaor of an imending bank collae. However onl a handful of main indicaor of a crii have been rooed for eimaing he collae of a bank. he mo alien oin of hee reearche include growh in roer credi and inerbank lacemen a indicaor of oible bank defaul. Converel higher credi aroval and a growing hare of radable ecuriie lead o a lower oibili of bank collae. Meanwhile conagion influence he collae of a bank in a number of cae bu he effec i minor. Davi and Karim (007) found ha heir reearch on earl warning indicaor (EWI) required he righ aroach among oher uing he logi mehod and ignal eracion. he differen mehod ued alo roduced differen erformance and crii redicion indicaor. he logi mehod garnered mo uor for a global EWI while ignal eracion wa found o be more counr ecific. In line wih financial ecor liberaliaion and develomen i i imeraive o uilie EWI for crii revenion. According o Karim dan Davi (007) financial ecor liberaliaion i he oening u of financial iniuion baed on marke mechanim b removing governmen conrain in he form of regulaion. 4
Demirguc-Kun and Deragiache (999) conduced a ud o redic he robabili of banking crie inended o be ued a an inrumen o monior vulnerabiliie in he banking ecor. heir reearch ued he mulivariae logi mehod wih anel daa and variable ha reflec he macroeconom and financial ecor. he macroeconomic variable included: GDP growh change in he erm of rade echange rae dereciaion inflaion and budge urlu/gdp. Meanwhile he variable choen o reflec he characeriic of he financial ecor were: M/foreign echange reerve and he level of bank credi growh wih a wo-eriod lag. In addiion GDP er caia wa ued a a ro for he rucural characeriic of he econom. he reul of he ud indicaed ha low GDP growh high real inere rae high inflaion and rong credi growh in he a a well a he magniude of he M raio o fore reerve imulaneoul rigger a higher incidence of banking crii. Converel echange rae dereciaion he erm of rade and budge urlu o GDP were no found o be ignifican. Uiliing robi or logi regreion model a well a he ignal aroach a earl warning indicaor ha a number of weaknee. Fir i arbiraril deermining he dae of he one of he crii which end o be lae (Von Hagen and Ho 003). Second i ha earl warning banking indur indicaor uing a correc and minimal andard deviaion (noie) o ignal have limiaion. hee limiaion neceiae he arbirar deerminaion of he banking crii hrehold value. Differen reearch aer have ued differen hrehold wihou roviding an rong argumen for he reaon wh. Eichengreen Roe and Wloz (996) e he crii hrehold a.5 andard deviaion from he mean while Kamink and Reinhar (999) e he hrehold a hree andard deviaion from he mean. In addiion he crii hrehold alo deend heavil on he ize of he amle. Addiional daa or longer eriod can aler he crii hrehold. he hird weakne i ha ranforming he crii inde ino binar can eclude relevan informaion. Due o he weaknee eoed when uing he robi/logi aroach and arbiraril deermining he crii hrehold he Markov-Swiching model i referable when inveigaing echange rae crie and banking crie. Uiliing hi model i no onl limied o idenifing he crii eriod bu i can alo be ued o redic he occurrence of banking crie. he ue of Markov-Swiching in analing or deecing he occurrence of banking crie ha a number of advanage. he fir advanage i ha he crii hrehold value i an endogenou variable or in oher word he crii eriod and i duraion form ar of he reul o be eimaed. Uing hi 5
aroach he econom i aumed o be in a ranquil ae or crii ae. herefore neiher of hee ae can be oberved direcl and boh are laen variable. Nonehele indicaor of boh ae can be oberved direcl b monioring behaviour in boh economic ae. he wo ae are differen wih a higher and more flucuaing value for a crii ae when comared o a ranquil ae (normal eriod). he hif in value from one ae o he oher deend on he raniion robabili. According o he characeriic of Markov he value of an ucoming ae deend on he curren ae. herefore hi model ermi he oibili of a crii ae remaining in a ae of crii. he econd advanage i ha he Markov-Swiching model allow he ue of coninuou deenden variable. Uing change in deoi or i inde can reven a lo of informaion if he daa i ranformed in he form of a dumm variable. he hird advanage of uing hi model i ha i can caure dnamic informaion from he crii. herefore hi model can be ued o eimae he duraion of he crii eriod from he robabili of he raniion eriod. he fourh advanage i ha hi model can be ued for non-linear behaviour. Uing Markov-Swiching o deec echange rae and banking crie ha develoed in recen ear due o he weaknee found in he ignal aroach namel arbiraril deermining he crii hrehold. Abiad (003) ued he Markov-Swiching aroach o anale an earl warning em for echange rae crie in Aia. Baed on hi reearch i wa found ha he model work well when deecing he occurrence of echange rae crie in Aia. he model could deec wo-hird of he crii eriod in he amle and creaed fewer fale ignal comared o he reviou model namel he ignal aroach. Reearch b Alvarez-Plaa and Schrooen (003) and Ho (004) alo roduced robu reul uing hi model o deec echange rae crie reecivel in Argenina and Aia. Meanwhile Ho (004) ued he Markov-Swiching model o deec banking crie uiliing aggregae daa. he reul of hi reearch howed ha hi model can uccefull deec banking crie in Aia. In he cae of Indoneia Agung e. al. (003) develoed an earl warning em o redic echange rae and banking crie b modifing he ignal eracion model develoed b Kamink Lizondo and Reinhar (999). he modificaion included ring o caure abnormal behaviour from he indicaor ued no individuall bu uing aggregae indice. hi wa underaken conidering ha leading u o a crii uch indicaor uuall move in union. he variable ued include: macroeconomic indicaor (real areciaion of he 6
domeic currenc M/foreign echange reerve) o redic echange rae crie and aggregae banking micro indicaor (ne inere margin) o redic banking crie. he reul how ha he ignal roduced from hi earl warning em are relaivel aifacor wih reecive robabiliie of accurac amouning o 67% and 90%. 3. Bank Performance amid a Crii A i oue he crii ha befell he Indoneian econom in 997 wa riggered b an echange rae crii on he ruiah. Inene dereciaor reure emmed from conagion from he bah echange rae crii haening in hailand in Jul 997. he affec of hi conagion no onl reached Indoneian hore bu alo read quickl o oher counrie in Aia like he Philiine Malaia and Souh Korea. he governmen inervened b inroducing economic olic ackage in Seember 997 in order o roec he domeic econom from a deeer crii a a reul of dereciaor reure and caial ouflow. hi rogram wa ubequenl eended o become an economic abiliaion and reform rogram garnering he formal uor of he IMF World Bank and ADB in November 997. In he imlemenaion of hi financial ecor reform rogram o reore he banking em 6 naional rivae bank were cloed on November 997. he cloure of 6 bank riggered wideread bank run on hoe bank deemed unound b he general ublic. Conequenl he olic o cloe bank which hould have aved he naional banking indur acuall rovoked bank run on bank no owned b he ae. hee bank run occurred due o a collae of ublic confidence in he banking indur due o he bank cloure. A he bank run read he financial erformance of all bank began o uffer wih credi loe and lower bank earning due o oor managerial racice ha did no adhere o aec of good governance (Wario 00 and Bank Indoneia 998). In addiion raid ruiah dereciaion welled he foreign deb of bank denominaed in ruiah which wa eacerbaed furher b he lack of a guaranee rogram. he abence of a guaranee rogram and lack of informaion regarding he condiion of he bank (ammeric informaion) forced he bank cuomer eeciall he cuomer of rivae bank o wihdraw heir deoi and diver hem o bank conidered more ound wih afer ae (currenc). 997/998 Bank Indoneia Financial Reor. 7
One monh afer he 6 bank were cloed (December 997) oal deoi held b naional rivae commercial bank declined b a much a R.9 rillion (.94%). Wihdrawal began a oon a he bank were cloed and eaked in December 997 and Januar 998. he wihdrawal began o eae when he governmen inroduced a blanke guaranee cheme in Januar 998. However when ocial unre erued in Ma 998 he number of bank eeriencing run increaed again. Baed on monhl bank reor ubmied o Bank Indoneia mo bank run affeced non foreign echange bank 3 bank wih frozen buine acivi 4 and bank wih frozen oeraion. 5 Run on non-foreign echange bank eaked in December 997 Januar 998 and Ma 998. A an illuraion in December 997 of he 45 non foreign echange bank 5 eerienced u o a 0% decline in deoi 7 eerienced u o a 0% decline 3 eerienced u o a 40% decline eerienced u o a 60% decline and i bank eerienced a decline of u o 80% of heir oal fund comared o he reviou monh. Similar o he cae of non-foreign echange bank run alo affeced bank wih frozen buine acivi (BBKU) and bank wih frozen oeraion (BBO). Mo wihdrawal occurred in November 997 u o 998 a well a in March hrough Ma 998. For inance in November 998 of he 40 BBKU a man a 6 eerienced a decline in deoi of u o 0% comared o he reviou monh while 4 bank eerienced a decline of u o 0% and wo bank eerienced a decline in deoi of u o 40%. Bank run on BBO followed a imilar aern o hoe on BBKU. In Januar 998 of he 0 bank wih frozen oeraion i eerienced u o a 0% decline in deoi on he reviou monh while 4 bank eerienced a decline of u o 40%. During he eriod from November 997 o Januar 998 of he even ae-owned bank none eerienced a dro in deoi of u o 0%. In fac he ooie wa rue namel ha deoi a ae-owned bank acuall eerienced oiive growh of 9.6% in November 997. Similarl wihdrawal from foreign bank followed a imilar aern a hoe from ae-owned bank. In November 997 onl one foreign bank eerienced an decline in deoi. 3 Non foreign echange bank are naional rivae bank ha are no ermied o underake an foreign echange acivi in heir buine acivi. 4 Bank wih frozen buine acivi are bank ha are emoraril no ermied o underake an buine acivi for a given eriod of ime. 5 Bank wih frozen oeraion are bank ha have had heir oeraional aciviie emoraril uended. 8
Meanwhile from December 997 o Januar 998 no decline of u o 0% were reored. In acuali deoi indicaed 6.8% growh in November 997. Again hi backdro he hare of deoi held a ae-owned and foreign bank increaed reecivel from 4.8% and 7.% in December 997 o 47.7% and 9.3% a he end of Januar 998. In conra he hare of deoi held a foreign echange bank and non-foreign echange bank conraced from 43.% and.% in December 997 o 36.9% and.5% in Januar 998 reecivel (able ). hi rend demonrae a hif in fund from rivae bank o ae-owned and foreign bank (fligh o quali). able. Share of Bank Deoi Bank Grou Share (%) Dec. 996 Dec. 997 Jan. 998 Feb. 998 Mar. 998 Commerical bank:. Saed-owned bank. Foreign echange bank 3. Non-foreign echange bank 4. Regional develomen bank 5. Join-venure bank 6. Foreign Bank 36.0 49.7 5.5.8.7 4. 4.8 43....4 7. 47.7 30.9.5.6 3.0 9.3 47.0 37..9.7 3.0 9.3 46.6 37.0.3.6.8 9. Rural Bank*) *Share again commercial bank Source: Bank Indoneia 0.5 0.4 0.3 0.3 0.3 In addiion o wideread fligh o quali fund were alo divered ino currenc a refleced b he 3.8% increae in currenc in he monh of Januar 998 (R 9.045 rillion) comared o he reviou monh. hi rend doe no follow he uual aern of demand for currenc which baed on he wo ear rior o he crii averaged u 9.5% annuall. Figure. Currenc and he Echange Rae Echange Rae ($US/R) Currenc Change (%) 6000 00.00 Currenc 4000 Echange Rae 80.00 000 0000 60.00 8000 6000 4000 000 0 996 997 998 999 000 00 00 003 004 005 006 007 008 40.00 0.00 0.00-0.00 9
he banking crii wa furher comounded b evere ruiah echange rae dereciaion. In Januar 997 he value of he ruiah again he US dollar wa R 396. hi oiion wa unenable and he ruiah began o lide. In Jul 997 he oiion of he ruiah again he dollar wa R 599 and in December 997 i wa R 4650. In 998 he ruiah weakened dramaicall o R 055 er US dollar in Ma 998 and coninued o deeriorae o i nadir in June 998 a R 4900. From hi low oin he ruiah began o recover reaching R 805 in December 998. Bank run couled wih large-cale ruiah dereciaion laced addiional reure on he balance hee bank balance hee. Accordingl uch condiion led o a decline in he erformance of naional bank overall. he decline in erformance affeced all financial aec of he bank including caial earning ae quali earning and liquidi. Caial dried u raidl from he one of he crii a refleced b a har decline in CAR for all bank from 9.9% a he end of December 997 o 5.68% a earend 998. Similarl he erformance of earning ae (KAP) meaured b comaring he amoun of ub-andard earning ae again oal earning ae deerioraed raidl from 4.80% a he end of 997 o 4.39% a he end of 998 before reurning o around.74% a he end of 999 a he credi from roubled bank wa handed over o he Indoneian Bank Rerucuring Agenc (IBRA). In line wih he deerioraion in KAP earning meaured b he reurn on ae (ROA) declined from.37% in 997 o 8.76% in 998 and 6.4% in 999. he loe incurred b nearl all bank were aribuable o he high co of fund borne b he bank couled wih inere rae on erm deoi oing 70% in Seember 998. Meanwhile KAP increaed and he amoun of credi allocaed declined in harmon wih he economic conracion (3.% in 998) and ecalaion in buine rik emming from ocio-oliical inabili and he deerioraing domeic ecuri iuaion. In line wih he decline in credi he bank loan o deoi raio (LDR) alo lummeed from 86.4% a he end of 997 o 7.37% a earend 998 and u 6.6% a he end of 999. 0
4. Daa and Model he Markov-Swiching model alied in hi aer ue laen variable ha follow he fir derivaive from he wo-ae markov channel namel. = denoe a crii ae and =0 a ranquil ae. In hi model however canno be oberved direcl bu he behaviour of he deenden variable ( ) i free from which can be ereed a follow: iid ~ N( ) () he deenden variable ( ) ued a an earl warning indicaor of bank run i he ercenage change in bank deoi from 990-005. herefore hi Markov-Swiching (MS) model onl ue a univariae model. he ercenage change in deoi wa choen a a variable conidering ha bank run are indeed large-cale fund wihdrawal. Accordingl ignal of erien wihdrawal of bank deoi would indicae a run on he bank. In he MS model he mean and variance from can change in line wih he regime. he deni of condiional can be wrien a follow: f ( ) ( ) e for = 0 () he laen variable from he wiching regime can be obained from he raniion robabili mari P a follow: Periode - Sae 0 Sae Period Sae 0 Sae 00 Pr( 0 0 ) F( 0) 0 ( ) Pr( 0 ) F( ) 0 ( 00) Pr( 0 F( 0) Pr( ) F( (3) where i i he robabili of changing from ae i in eriod - o ae in eriod and F i he normal cumulaive diribuion funcion cdf comonen of vecor k and i he earl warning indicaor ha can influence he raniion robabiliie.
An iniial value i required o ar he model namel Pr( ) which i he uncondiional robabili of ae in eriod. he handling of hi value deend on wheher i i aionar or no. If i aionar hen he long-erm robabili i and i a funcion of ). Meanwhile if i no aionar hen ( 0 i an addiional arameer ha mu be eimaed. In racice if he ime erie daa i long enough hen he likelihood funcion will no be affeced wheher i i calculaed uing he funcion of ) earael or he value i fied no ignifican change occur. ( 0 he eimaion rocedure maimie he likelihood funcion. he likelihood funcion i calculaed uing he ieraion develoed b Hamilon (990). Uing available informaion u o eriod we can formulae Pr( ) namel he (filered) condiional robabili of obervaion i roduced b regime for = N. N i he oal ae. In hi reearch N=. he condiional robabili can ubequenl be groued in he vecor (N) ˆ. he eimaion can alo be erformed uing (foreca) condiional robabili roduced b regime in eriod + wih he informaion u o eriod which can be ereed a Pr( ) for = N. Eimaing hi robabili he condiional robabili can ubequenl be groued in he vecor (N) ˆ. Finall can be ereed a vecor (N) which ha comonen and rereen he condiional deni funcion from Equaion (). he filered robabili and calculaion for each eriod wih he ieraion from he equaion i a follow: ˆ ( ˆ o ) (4) ' ( ˆ o ) ˆ P ˆ ' (5) where P i he NN mari of raniion robabili from eriod - o eriod a found in Equaion (4) and o i he mulilicaive noaion of each reecive elemen. Equaion (5) i ued o olve Pr( ) a he oin diribuion raio f ( ) again he marginal diribuion f ( ). he marginal diribuion can be obained b adding u he oin diribuion of boh ae. Equaion (5) indicae ha wih he be eimae for he curren ae
we can iml mulil he ranformaion mari P of he raniion robabili o find he robabili of each ae in he ubequen eriod. In addiion he raniion robabili i eimaed uing equaion (6) hrough (4) a howed a aachmen. 5. Emirical Reul A elaboraed in Secion 4 Markov-Swiching and an auo-regreive aroach were ued o calculae he raniion robabili from a ranquil ae o a ae of bank run a aed a equaion () hrough (5) eimaed uing equaion (6) hrough (4) a aachmen. Eimaion were erformed uing he variable of ercenage change in deoi a individual bank (). Daa moohing wa ued wih a Kalman filer o enure aionar daa. Meanwhile he validi of he MS model wa eed a an earl warning indicaor of bank run hrough a comarion wih acual incidence of bank run. a. Sae-Owned Bank (BP) Signal of bank run in he Markov-Swiching (MS) model can be oberved from he raniion robabili value of changing from a ranquil ae (no bank run) o a ae of bank run. A value of more han 0.5 imlie a greaer hen 50% chance of bank run and a value of mean he robabili ha rien o 00%. Converel if he value i 0 hen he robabili of bank run i zero. he reul of he MS model for ae-owned bank indicaed var rare incidence of ignal of bank run (able ). Such condiion are refleced b a raniion robabili from ranquil o crii of 0 for nearl all monh in he amle eriod. Of he 47 monh under obervaion for each individual bank onl 6 indicaed he oenial occurrence of bank run for BP 7 monh for BP 5 monh for BP3 4 monh for BP4 and 5 monh for BP5 wih value in he range of 0.7 o. However hee ignal of bank run were no erien a refleced b a dro in value from 0.7- down o 0 (Aachmen ) in he ubequen monh. Meanwhile during he banking crii from 997-998 he MS model did no generae an ignal of run on ae-owned bank a evidenced b a raniion robabili value of 0 during he eriod in queion. Comaring he e reul again acual incidence of bank run during he 997-998 eriod how ha he MS model wa able o accurael deec bank run. 3
During he obervaion eriod from Januar 988 - March 000 for five ae-owned bank onl i monh (0.8%) roduced erroneou ignal of bank run (e error). 6 able Reul of Markov-Swiching for Sae-Owned Bank No Bank Dae of Bank Run BP Ar Ma Aug & Nov-88 Jan Ar Jul Aug & Oc-89 Jan Ar Jul & Aug- 90 Feb & Mar-9 Se-94 BP Ar & De-9 Oc Nov 9 De-99 Jan & Feb-00 3 BP3 Mar & Ar-9 Oc Nov & De-99 4 BP4 Mar Ar & De-9 Se-94 5 BP5 Aug-89 Mar Ar Ma & ul-90 b. Foreign Echange Bank (BSD) Baed on anali reul for 6 rivae foreign echange bank (BSD) uing he MS model ignal of bank run were a common occurrence for 7 bank (able 3). Such condiion were evidenced b a raniion robabili value for each bank in he range of 0.8 o wih he value eriing for a number of monh. Baed on a review of acuall incidence of bank run in aricular during he banking crii of 997-998 all even of he bank eerienced run. In he eriod before and afer 997-998 all even of he bank alo indicaed ignal of bank run wih a raniion robabili value in he range of 0.7 o (Aachmen ). Converel he reul of Markov-Swiching indicaed ha bank did no dila ignal of run a demonraed b a raniion robabili value of zero. Oher foreign echange bank onl roduced oradic ignal of bank run and he ignal did no eri over everal monh. Of he oal 6 monh oberved (Januar 988 December 005) and 6 bank onl 57 monh were found o roduce erroneou ignal (.0%). 7 6 he meaure of acual bank run wa deermined b a bank ha eerienced a bank run a well a bank ha encounered liquidi difficulie a a reul of large-cale wihdrawal b heir cuomer. A value of 0.8% wa obained from all fale ignal divided b oal monh for 5 bank namel 6 divided b 735. 7 Calculaed from oal erroneou ignal divided b he number of monh in he obervaion eriod mulilied b he number of bank in he amle. herefore he value of.0% i obained from 57/(6 6). 4
able 3 Reul of Markov-Swiching for Privae Foreign Echange Bank No Bank Dae of Bank Run BSD5 Aug-90 Se-9 Aug Se & De97 Jan Feb & Mar-98 Aug & De- 00 No & De-00 Jan Ma Jul & Aug-0 Aug-03 Se-04 BSD0 Aug-90 Jun Jul Nov & De-9 Jan-93 Oc & No-97 Jan Feb & Mar- 98 Feb Se Oc Nov & De-99 Feb Mar Ar Ma Jun & Jul-00 Jan Aug Se & Oc-0 Aug-0 Aug-03 3 BSD9 De-88 Oc-89 Jan Feb & Se-90 Nov & De-97 Jan Mar Ar Jun Jul & Aug-88 Mar Ar Jun Jul & Aug-99 Ar & Ma-00 Jul & Oc-0 Jan Ar Jun & Aug03 De-04 Jan & Nov-05 4 BSD Oc-95 Aug & Se-98 Mar Jun & Jul-99 Se & Nov-0 Feb Mar Aug Oc & Nov-03 Jan Ar Ma Nov & De-04 5 BSD3 De-97 Jan Ma Jun Jul Se & Nov-98 Jan Feb Mar Ar Jul Aug Oc & De-99 Jan Feb Mar & Ar-00 Nov & de-0 Ma & Aug-03 Nov-05 6 BSD4 Feb Ar Jun Aug & Oc-9 Se & De-9 Mar-93 Feb Mar Ar Jun Jul & Aug-98 Jul-00 Aug & e-0 Jan-Oc & Nov-05 7 BSD6 Se-88 Oc & Nov-9 Jan Ar & Jun93 Jul-96 Jun & Jul-98 Mar Jul & Aug-99 Jan Jul Aug Oc Nov & De-03 Feb-05 c. Privae Non Foreign Echange Bank he reul of Markov-Swiching howed ha of he 3 rivae non foreign echange bank under obervaion a man a 0 ignalled frequen bank run wih a raniion robabili value in he range of 0.8 o (able 4). A comarion wih wha acual occurred how ha he 0 bank faced evere bank run in 997-998. Prior o eeriencing bank run in 997-998 he 0 bank alo howed erien ignal of bank run a indicaed b he robabili value in he range of 0.9 o. Similar ignal eried unil he ear 000 wih he magniude eaing lighl in he range of 0.8 o. Meanwhile oher non-foreign echange bank alo generaed ignal of bank run bu le frequenl han he 0 bank menioned revioul. Furhermore he raniion robabili value wa lower for hee bank in he range of 0.6 o (Aachmen ). During he banking crii in 997-998 he bank did no uffer bank run. When comared o wha acuall haened Markov-Swiching roduced erroneou ignal for 94 monh (.4%). 5
herefore he MS model can be conidered ufficienl accurae in he deecion of run on nonforeign echange bank. able 4 Reul of Markov-Swiching for Privae Non Foreign Echange Bank No Bank Dae of Bank Run BSND De-88 Jul Oc & De-93 Feb Ar Jul & Se-95 Nov-De-97 Jan-98 BSND3 De-88 De93 Nov & De-94 Feb Mar Ar Jun & Se-95 Feb & Mar99 Oc & Nov-0 De-0 De-03 De-04 Jan Jun & Jul-05 3 BSND6 Mar Nov & De-88 De-93 Jan Se Oc Nov & De-94 Feb Mar Ar Jun Aug & Se-95 Nov & De-97 Mar-99 Nov-0 4 BSND7 Mar Jun Se & De-88 Oc-89 Nov & De-93 De-94 Ar Jul Aug & Se-95 Oc & Nov-97 Jan-98 Feb Mar Ma Jun Jul Aug & Nov-99 Oc Nov-0 Jan-03 Jan-04 Jan-05 5 BSND9 Mar Jul Nov & De-88 Jan-90 Ar-9 Jul-93 De94 Ar & Se-95 Nov & De-97 Feb-99 6 BSND0 Mar Jun & Nov-88 Jan Ar Jul Oc & De-9 Feb Ar Jul Aug Oc & Nov-9 Jan Feb Ar Ma Jul & Se-93 Mar Ar Se Nov & De-94 Feb Mar Ar Aug & e-95 De-97 Jul-98 Feb Mar Jul & Oc-99 7 BSND Aug Se & Oc-88 Jan Aug & nov-9 Ar Ma Jun Jul Aug Se & De-9 Feb Ar Ma Jul Nov & De-93 Ma Jul Se Oc & De-94 Feb Ar Jun & Se-95 Feb Ar Ma Jun Jul Nov & De- 96 Jul Se & Nov-97 Ma Jun Aug Se Oc & De-99 Jun-00 8 BSND4 De-9 De-93 Feb Ar Nov & De-94 Mar Ar Jul & Se-95 Jan Aug Se Nov & De-97 Ar Ma Jul Oc-98 Mar Ar & Ma- 99 9 BSND6 Ma & Jul-88 Jul Nov & De-93 Jul Se & Oc-97 De-98 Jan Mar Ar & Ma-99 0 BSND7 Ma-88 Nov-9 Feb Jul Se & De-93 Mar Ar Jun & De94 Feb Mar Ar Jun & Se-95 Aug Se & Oc-97 Ma Aug Se Oc & De-98 Jan Ar Ma Aug & Oc-99 Jan Feb Mar Ma-00 BSND8 Jun Jul Oc & Nov-88 Jan-9 Jun Jul Se Nov & De-93 Nov & De-94 Mar Ar & Se-95 Jan Mar Jun Aug Oc & Nov-98 Jan Feb & Mar-99 BSND9 Ma Jul Se & No-88 Jan Ar & Ma-9 Jan Feb Jul Se Oc & De-93 Jan Feb Mar Ar Jul Aug Se & De-94 Feb Jun Jul & Se-95 Mar Ar Jul Se Nov-96 Jan Feb Ar Jul Aug Se Oc & Nov-97 Mar Ar Jun Se Oc & Nov-98 Jan Ar Se & Oc-99 Feb & Jul-00 3 BSND0 Jul & Aug-88 Jan Ar Jul & Aug9 Feb Ar Jul Aug & De-93 Mar Ar Ma Jul Se & De-94 Mar Ar & Se-95 Mar & No-96 Jan Ma Jun Jul & Oc97 Jan Jun Jul Aug Se Oc & Nov-98 Jan Feb Mar Jul Se & Oc-99 4 BSND Mar Ma Jul Oc & Nov-88 Oc-9 Mar & De-93 Nov & De94 Ar Jul & Se-95 De-97 Jan-98 Feb-99 Jul-00 5 BSND Mar & Jul-88 Jan Jul Se & De-93 Mar Ma Jul Aug & De-94 Mar Ar Jun Jul Aug Se Nov & De-95 Mar Ma Jun Jul Oc & De-96 Ma Oc & Nov-97 Mar Ma Aug Nov & De-98 Jan Mar Ma Jun Jul Se & De99 Jan Feb & Mar-00 6
6 BSND5 Mar Ma & Jun-88 Oc & De-93 Oc & De-94 Jan Ar Jul & Se- 95 Oc & Nov-97 Jan Ma Jul Aug Se Oc & De-98 Ar & Jul99 7 BSND6 Se & No88 Jan Jul & De-93 Mar Aug Oc & De-94 Jan Ar Se & De-95 Mar-96 Feb Oc & Nov-97 Jan Ma Jun & Aug-98 Jan Mar Jul & De-99 Feb Mar Ma & Jun-00 8 BSND7 Jul & Se-98 Jan & Jul-93 Ar & De-94 Ar Se & Nov-95 Jan Feb Ar Ma Jun Jul Se Oc Nov & De-96 Se & De-97 Jan Ma Jul Se & De-98 Feb Mar Ar Ma Aug Nov & De99 Jul- 00 9 BSND9: Ma Jun Jul & Nov-88 Mar Jun Aug Nov & De-94 Feb Ar Jul Aug & Se-95 Aug Se Oc & Nov-97 Ar Ma Aug Se Nov- 98 Feb Mar Ma Jun Jul Se & Oc-99 Mar-00 0 BSND3: Ar Jul & De-94 Mar Ar Se Nov & De-95 Jan Ar Ma Aug Oc & Nov-96 Feb Ar Aug Nov & De-97 Jun Aug Oc De-98 Jan Ar Ma & Aug-99 Feb Mar & Jun-00 d. Foreign Bank he reul of Markov-Swiching (MS) howed ha four ou of he i foreign bank eed ofen roduced ignal of bank run wih a raniion robabili value in he range of 0.6 o (able 5). During he banking crii in 997/998 and baed on he MS model he four bank in queion eerienced bank run. In conra he wo remaining foreign bank did no roduce ignal of bank run a indicaed b a raniion robabili value of zero (Aachmen ). Acual eerience how ha neiher bank wa rone o run. Holiicall of all he daa oberved for he eriod from Januar 988 o December 005 he MS model roduced erroneou ignal for 7 monh or.08% of he oal i bank over 6 monh. herefore he ignal roduced b he MS model were ufficienl accurae in he deerminaion of run on a aricular foreign bank. able 5 Reul of Markov-Swiching for Foreign Bank No Bank Dae of Bank Run BA Jan Ar Ma Se & De-90 Jan Feb Mar Jun & Jul-9 Jul & Se-97 Jun Jul Aug & Se-98 Jan Aug Se & Oc-0 Jan Feb & Ma 03 Jan Mar Ar Aug & No-04 Fe Jun Jul & Aug-05 BA Feb Ma Se Oc & No-89 Jan Mar Ar Jun Jul Aug & Oc-90 Jan Ar Aug Se & No-93 Jan Ar Aug Se & No-93 Feb Mar Ar Jul Oc & De-95 Jan Feb Mar Ar & Aug 96 Jan Mar Ar Jun Jul Aug & Oc-97 Feb Jul Aug Se & No-98 Feb Ma Jun & Aug-00 Jan Feb Mar Jun Jul Aug Oc & De-0 Jan Feb Mar Ar Jul Aug Oc-0 Ar Ma & Jul-03 Jan Feb Mar Ar Jun Se & Oc-04 Jan Feb Mar Ar & Aug-05 3 BA3 Ar Jul & De-93 Feb Mar Ma Jun Se Oc & Nov-94 Jan Mar Ar Ar Jul Aug & Oc-95 Feb Mar Ma Jun & Aug-96 Feb Aug Se Oc- 97 Ar Jun Jul Aug Se Oc & De-98 Jun-99 Feb-0 Jul Se & 7
Oc-04 Jan Jun & Jul-05 4 BA4 Jun Aug Oc & De-89 Jan Ar Ma Jun & Aug-90 Ma Aug Oc & De-93 Feb & Mar-94 Jul Oc & De-95 Feb & Mar-96 Jun & Oc-97 Ar Jun Jul & Aug-98 Ma Jun & Aug-05 e. Join Venure Bank (BC) he reul of he MS model for he nine oin venure bank oberved howed indicaion of bank run during he banking crii in 997-998 wih a raniion robabili value of denoing a 00% chance of bank run. hi i congruou wih wha acuall haened where all nine bank eerienced run. Meanwhile in erm of frequenc four bank regularl uffered run (able 6) wih a robabili value in he range of 0.7 o. A comarion wih wha acuall ranired how ha he MS model roduced fale ignal for 8 monh or 0.93% of he oal bank and monh oberved. he reul of Markov- Swiching for oin venure bank demonraed ha he model i ufficienl accurae when ued a an earl warning indicaor of bank run a reecive individual bank. able 6 Reul of Markov-Swiching for Join Venure Bank No Bank Dae of Bank Run BC Ar Aug Oc Nov & De-90 Feb Mar Ar Ma Aug Se & Nov-9 Jan Mar Jul Aug & Oc-9 Jan Feb Ma Jul Aug & Oc-93 Jan Mar Ar Jun Jul Aug & Oc-94 Jan Feb Mar-95 Se Oc Nov & De-96 Feb Mar Ar Ma Aug & Nov-97 Feb Mar Ar Jul Oc Nov & De-98 Jan Feb Ar Ma & Aug99 Se-04 Jan Feb Ma-05 BC5 Ma Aug & No90 Mar Ar Ma Jul & Oc-9 Jan Ar Ma Jun Jul & Aug-04 Aug Se & Nov-97 Feb Ar Jun Jul & Se-98 3 BC6 De-89 Jan Ar Ma Jul Aug Oc Nov De-90 Jan Ar Ma Jun Nov & De-9 Jan Ar Jun Aug & Oc-9 Jan Ar Ma Jun Jul Oc & De- 93 Mar Ar Jul Aug Oc Nov & de-94 Feb Mar Ar Jun Jul Se Oc & De-95 Jan Mar Ar ul Aug & De-96 Feb Jul Se & Oc97 Jan Mar Ar Ma Jul Se Oc Nov & De-97 Feb Mar Ar Jun Jul & De- 99 Feb Mar Jun Jul Aug & De-00 Jan-0 4 BC7 Jul & Oc-90 Jan Ar Ma Jun Aug & Nov-9 Jan Se & Oc-9 Jan Feb Mar Ar Ma Jun Jul Aug Se & Oc-93 Mar Ar & Ma-94 Ar Jun Aug Oc Nov & De-95 Jan Mar Ma Jun Se Oc & Nov-96 Jan 8
Mar Ma Jun Se Oc & Nov-97 Ar Jun Jul Oc & Nov-98Mar Jun Aug-99 Mar Ma Jul & Aug-03 Jan Mar Ar & De-04 Ar Jun & Jul-05 f. Bank wih Frozen Buine Acivi (BBKU) Of he eigh bank wih frozen buine acivi analed uing he MS model onl wo did no roduce ignal of bank run during he banking crii in 997-998 while he five oher bank did (able 7) wih a robabili value in he range of 0.9 o. BBKU and 3 ofen roduced ignal of bank run wih a raniion robabili value in he range of 0.9 o (Aachmen ). Such condiion are in harmon wih wha acuall occurred during he obervaion eriod. When comared o wha haened in acuali baed on a full amle here remain monh of erroneou ignal or 0.69% of oal obervaion. he fale ignal were roduced b u four bank herefore he MS model i ufficienl robu for ue a an indicaor o deec run on roubled bank a well a an indicaor of uerviion on oher individual bank. able 7 Reul of Markov-Swiching for Bank wih Frozen Buine Acivi (BBKU) No Bank Dae of Bank Run BBKU Aug-89 BBKU Aug & Oc-89 Jan Jul Aug & No-90 Jan Feb Ar Jul Aug & Oc-9 De-9 Jan Jul & Aug-93 Jan-94 Oc Nov & De-98 3 BBKU3 Mar & No-88 Jul & Aug-90 Jul Aug & De-9 Oc Nov & De-9 Nov 98 4 BBKU4 Nov-88 Jul & Aug-90 Nov & De-9 De-93 De-98 5 BBKU5 Aug-89 Se-9 De-93 Se & Oc-94 Feb Ar & Jun-96 6 BBKU6 Oc Nov & De-88 Jan & Oc-89 De-98 7 BBKU7 Mar Ma Jun Aug Se Oc Nov & De-98 8 BBKU8 Ar Ma Se Oc Nov & De-98 g. Bank wih Frozen Oeraion (BBO) he reul of he MS model how ha of he even frozen bank (BBO) under obervaion i roduced ignal of bank run during he banking crii eriod of 997-998 a 9
refleced b he value of raniion robabili oalling. he i BBO alo regularl generaed ignal of bank run rior o he crii (able 8). One oher bank BBO6 onl roduced ignal of a bank run in 993. he reul of he comarion wih real even how ha he MS model uccefull elain he henomena of run on bank ha had heir oeraion frozen during he eriod of 997-998 in Indoneia. From all of he obervaion onl 9 ime were erroneou ignal roduced or.6%. able 8 Reul of Markov-Swiching for Bank wih Frozen Oeraion (BBO) No Bank Dae of Bank Run BBO Aug Oc & No-88 Jul & Aug-89 De-97 Jan Ar Ma & Jun-98 BBO Aug & No-89 Feb-93 Nov & De97 Jan Feb Mar Ar Ma & Jun-98 3 BBO3 Aug & Nov-88 Aug & De-89 Ma & Aug 90 Se Oc & De-97 4 BBO4 Aug-90 Jan Feb & Ar-9 Jun-9 De-94 De-97 Jan-98 5 BBO5 De-9 Aug Se Oc & De-97 Feb Mar & Jun-9 Aug Se Oc & De- 97 Jan-98 6 BBO6 Feb Mar & Jun-93 7 BBO7 Ar Se Oc & Nov-9 Jan Ar Oc & Nov-93 Jan Feb Ma Aug & Nov-94 Feb Se & De-95 Feb-96 Jan Ar Aug Se Oc & De-97 Jan- 98 6. Concluion and Polic Imlicaion a. he reul of Markov-Swiching (MS) demonrae ha he MS model i robu a an earl warning indicaor of bank run on he rengh of eing again wha acuall haened a 0 bank wih erroneou ignal roduced in u 0.69% o.08% of cae. b. Earl warning indicaor of bank run uing he MS model howed ha hoe bank rone o run and roubled bank erienl ignalled bank run in eimaion uing he model. he monhl model could be develoed furher o become a dail model ued o deec he robabili of bank run. o hi end he MS model i recommended a a ool o deec bank run wihin he uerviion ccle of individual bank according o he rik- 0
baed uerviion alied in Indoneia. he earl warning indicaor (EWI) roduced b he MS model in he uerviion ccle are equall imoran a he rik-rofile aemen of each reecive bank hu EWI informaion can nergied wih he aemen of bank buine rik in order o reven fuure occurrence of bank run or oher roblem ha hreaen he buine coninui of he banking indur.
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Markov-Swiching Eimaion Aachmen hi aendi elain in deail he eimaion roce of raniional robabiliic value ha i ued a earl warning indicaor (EWI) of bank run. In rincile our Markov-wiching eimaion model i an MS auoregreive model develoed b Hamilon (990). We ue he ercenage value of change in deoi/hird ar fund ( ) a he earl warning indicaor variable. I i aumed ha follow an AR(3) 8 roce where he arameer can change from a normal ae (where here are no bank run ) o he ae where here are bank run. We can wrie he auoregreive roce of a Wih 0 N. ~ 3 3 (6) If we wrie he above equaion in a more comac form we will have he following ereion Wih ' (7) ' (8) 3 ' (9) 3 he diribuion funcion of equaion (7) can be wrien a z e (0) a he log-likelihood funcion of equaion (7) i log z log log () FOC ha maimize he above log-likelihood funcion i 8 We ue AIC and SBC o deermine he oimal lag lengh. 5
6 z ' ' log 0oherwie And 4 ' log z According o Hamilon he likelihood funcion of he above ereion i z L log () If we define ' ' ' ' (3) ' S (4) Following Hamilon (990) we can wrie he oin marginal diribuion of he wo ae a S S (5) We can define a new funcion which defined a he eecaion of he log-likelihood S i i i i S S Q. log (6) hi funcion i ver ueful in he roce of maimizing he log-likelihood. According o Hamilon he FOC condiion i aified if 0. log S i i i i i i S S Q Hamilon (990) roved ha he above ereion aified he FOC ha maimize he loglikelihood funcion. he log-likelihood funcion i maimized b defining he following Lagrange funcion k L J (7) Uing hi funcion we will ge
7. L J ' ) ( ) ( 0 ' (8) B muliling he denominaor wih 0 we will ge 0 ' (9) We can olve he above equaion wih 0 ' (0) ' ˆ * * * * ' ˆ () Where * and *. L J 4 ' 0 ' 4 () B olving he above equaion we will ge ˆ ' ˆ (3) 3. L J 0 (4)
8 B olving he above equaion we will ge 0 (5) We can imlif he above equaion ino he following ereion (6) Summing for = k we will ge K K. Becaue K K and. We will ge he eimaor b ˆ (7) Baed on Hamilon (990) we can rove ha he following raniional diribuion aified he FOC n i i i (8) he algorihm for eimaing he arameer wih arbirar iniial value i K K (9) (30) K (3)
9 i aken from he reviou value wih 0 0 0 a he iniial value. he laer value i randoml eleced and ued a he iniial value in he eimaion roce. For he wo-ae markov change regime cae a ued in hi aer he raniional robabili value can be calculaed uing he following equaion: n (3) (33) (34) n n (35) 0 0 0 0 0 0 K K n n i 0 0 (36) K (37) (38) (39)
30 (40) n 0 0 (4) Where i aken from raniion mari while i aken from condiional diribuion equaion. he iniial value ued i 0 0. Wih he ame rocedure we can alo eimae he value of. he iniial value ha we ue o eimae he arameer are 3 3
Plo Deoi Change and Ergodic Probabili o Bank Run Sae Aachmen. Saed-owned Bank (BP) 3
. Privae Foreign Echange Bank (BSD) 3
3. Privae Non Foreign Echange Bank (BSND) 33
4. Foreign Bank (BA) 34
5. Join Venure Bank (BC) 35
6. Bank wih Frozen Acivi (BBKU) 36
7. Bank wih Frozen Oeraion (BBO) 37