Doctoral Promotion PPIE FEB UI: The Impact of Domestic Investors’ Participation in Government Debt on Banking Intermediation
Nino Eka Putra ~ Public Relations FEB UI
DEPOK – (28/7/2022) The Postgraduate Program in Economics (PPIE), Faculty of Economics and Business, University of Indonesia, held an open session of Justina Adamanti’s Doctoral Promotion online, Thursday (28/7).
Prof. Nachrowi Djalal Nachrowi, Ph.D., chaired the Doctoral Promotion Session, with supervisors Sugiharso Safuan, Ph.D. (Promoter), Zaafri A. Husodo, Ph.D. (Co-Promoter). The team of examiners were Diah Widyawati (Chief Examiner), Dr. Beta Yulianita Gitaharie, Febrio Nathan Kacaribu, Ph.D., Dr. Mahjus Ekananda, Inka B. Yusgiantoro, Ph.D., and I.G.P. Wira Kusuma, Ph.D..
In this open session, Dr. Justina Adamanti presented her dissertation entitled “The Impact of Domestic Investors’ Participation in Government Debt on Banking Intermediation.” Promovenda Justina Adamanti conducted research by explaining that domestic investment in government debt, in total and by domestic banks as investors, has a crowding-out effect on bank lending to the private sector, as shown by several previous studies.
Currently, domestic non-bank investors’ dominance is increasing in developed and developing countries. This dissertation consists of two studies that compare the crowding-out effects of domestic bank and non-bank participation in government debt on bank lending to the private sector. The first cross-country study compares the impact of crowding-out in developed and developing countries. In contrast, the second study is a specific study on Indonesia as a developing country with less deep financial market characteristics and a bank-centric financial system.
The cross-country study uses data from 23 developed and 23 developing countries from 2005Q1 to 2018Q4. The empirical results based on the non-stationary dynamic panel method show that the higher participation of domestic banks in domestic government debt can reduce bank lending to the private sector.
Moreover, this study finds that the impact is deeper in developed countries than in developing countries. Meanwhile, non-domestic bank participation in government debt only has a negative impact in developing countries, with a lower impact than domestic bank participation. Thus, the total crowding-out impact of domestic investors in government debt on banking intermediation is more extensive in developing countries than in developed countries.
To support the cross-country study, the study conducted a specific analysis of domestic investor participation in government bonds in Indonesia from January 2009 to December 2019 using the vector error correction model (VECM) method. In line with the cross-country study, the empirical results show a negative relationship between domestic ownership of government bonds and bank deposits and loans to the private sector.
The crowding-out effect of bank lending to the private sector from bank holdings is more severe than non-bank holdings in government bonds. However, non-bank holdings in government bonds reduce bank deposits more than bank holdings in government bonds. That suggests the possibility of domestic fundraising competition between the banking sector and the government.
The findings of this dissertation suggest a potential crowding-out effect on banking intermediation when the involvement of domestic investors, other than banks, is increased to participate in government debt. Therefore, governments and relevant authorities in developing countries need to deepen financial markets to increase domestic funds and investment instruments that can reduce the direct reallocation of funds from banks to governments when non-bank domestic investors participate in government debt.
The Board of Directors of the open doctoral promotion session decided that Justina Adamanti passed with a Very Satisfactory predicate and obtained the 132nd Doctoral Degree in Economics. Congratulations to Dr. Justina Adamanti!