Monetary Policy, Liquidity, and the Risk Profitability Nexus: Evidence From Indonesian State and Private Banks
DOI:
https://doi.org/10.61987/bamj.v3i2.1643Keywords:
Credit Risk, Capital Adequacy , Indonesian Banks Liquidity, ProfitabilityAbstract
This study aims to analyze the nexus between liquidity, credit risk, capital adequacy, and profitability in the banking sector under varying macroeconomic conditions. A quantitative approach is employed using panel data with a sequential modeling strategy. In the first stage, the effects of policy interest rates and inflation on liquidity, proxied by the Loan-to-Deposit Ratio (LDR), are examined. The second stage analyzes the influence of LDR and the Capital Adequacy Ratio (CAR) on credit risk, as measured by Non-Performing Loans (NPL), using a fixed-effects model. The third stage evaluates the impact of LDR, CAR, and NPL on profitability, proxied by Return on Assets (ROA), using a random effects model. Dummy variables and interaction terms are included to capture structural differences across bank types, with robust standard errors applied to ensure reliability. The results indicate a significant risk–return trade-off: higher liquidity and stronger capital adequacy contribute to improved profitability, while increased credit risk adversely affects financial performance. The findings imply that effective liquidity and capital management are essential for maintaining financial stability and optimizing bank profitability, particularly during periods of economic uncertainty.
References
Alamsyah, F. A., Gunawan, S. B. F. E., Hamsal, T. C. M., & Tjhin, F. D. V. U. (2025). The Role of Financial Stability in Enhancing Resilience within Multi-Finance Organizations. International Journal of Applied Mathematics, 38(8s). https://doi.org/10.12732/ijam.v38i8s.624
Alfawareh, F. S., & Chai-Aun, O. (2025). Digital Payments, Ownership Structure, and Bank Performance: Insights from Jordan. International Journal of Bank Marketing, 43(2), 262–291. https://doi.org/10.1108/IJBM-01-2024-0062
Anderson, G., & Cesa-Bianchi, A. (2024). Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity. American Economic Journal: Macroeconomics, 16(3), 417–446. https://doi.org/10.1257/mac.20210455
Annas, M., Humairoh, H., & Endri, E. (2024). Macroeconomic and Bank-Specific Factors on Non-Performing Loan: Evidence from an Emerging Economy. Calitatea, 25(199), 155–161. https://doi.org/10.47750/QAS/25.199.17
Anwar, C. J., Suhendra, I., Didu, S., Sayektiyani, A., & Kholishoh, L. N. (2023). The Impact of Monetary Policy and Credit Risk on Bank Credit Behavior: An Analysis of Banks Listed on the Indonesian Stock Exchange. Cogent Economics & Finance, 11(1), 2220250. https://doi.org/10.1080/23322039.2023.2220250
Arhinful, R., Mensah, L., Gyamfi, B. A., & Obeng, H. A. (2025). The Impact of Non-Performing Loans on Bank Growth: The Moderating Roles of Bank Size and Capital Adequacy Ratio—Evidence from US Banks. International Journal of Financial Studies, 13(3), 165. https://doi.org/10.3390/ijfs13030165
Ayinuola, T. F., & Gumel, B. I. (2023). The Nexus between Liquidity and Credit Risks and Their Impact on Bank Stability. Asian Journal of Economics, Business and Accounting, 23(11), 15–27. https://doi.org/10.9734/ajeba/2023/v23i11975
Ben Lahouel, B., Taleb, L., Ben Zaied, Y., & Managi, S. (2024). Financial Stability, Liquidity Risk, and Income Diversification: Evidence from European Banks Using the CAMELS-DEA Approach. Annals of Operations Research, 334(1), 391–422. https://doi.org/10.1007/s10479-022-04805-1
Bianchi, J., & Bigio, S. (2022). Banks, Liquidity Management, and Monetary Policy. Econometrica, 90(1), 391–454. https://doi.org/10.3982/ECTA16599
Boachie, C. (2023). Corporate Governance and Financial Performance of Banks in Ghana: The Moderating Role of Ownership Structure. International Journal of Emerging Markets, 18(3), 607–632. https://doi.org/10.1108/IJOEM-09-2020-1146
Boamah, N. A., Opoku, E., & Boakye-Dankwa, A. (2023). Capital Regulation, Liquidity Risk, Efficiency, and Banks Performance in Emerging Economies. Journal of Financial Regulation and Compliance, 31(1), 126–145. https://doi.org/10.1108/JFRC-09-2021-0076
Boutfssi, A., & Quamar, T. (2026). Short-Run Monetary Policy Transmission, Credit Risk, and Bank Portfolio Adjustments: Evidence from the Non-Financial Corporate Sector in an Emerging Economy. Journal of Risk and Financial Management, 19(3), 178. https://doi.org/10.3390/jrfm19030178
Camara, S., Christiano, L., & Dalgıc, H. (2025). The International Monetary Transmission Mechanism. NBER Macroeconomics Annual, 39(1), 65–140. https://doi.org/10.1086/735260
Dai, J., Farooq, U., & Alam, M. M. (2025). Navigating Energy Policy Uncertainty: Effects on Fossil Fuel and Renewable Energy Consumption in G7 Economies. International Journal of Green Energy, 22(2), 239–252. https://doi.org/10.1080/15435075.2024.2413676
Gürkaynak, R., Karasoy‐Can, H. G., & Lee, S. S. (2022). Stock Market’s Assessment of Monetary Policy Transmission: The Cash Flow Effect. The Journal of Finance, 77(4), 2375–2421. https://doi.org/10.1111/jofi.13163
Hastuti, I. N., Wibowo, R. E., & Nurcahyono, N. (2024). The Effect of Capital Adequacy Ratio, Non-Performing Loan, and Debt Equity Ratio on Financial Performance. Economics and Business International Conference Proceeding, 1(1), 13–24.
Jaswadi, J., Purnomo, H., & Sumiadji, S. (2024). Financial Statement Fraud in Indonesia: A Longitudinal Study of Financial Misstatement in the Pre- and Post-Establishment of Financial Services Authority. Journal of Financial Reporting and Accounting, 22(3), 634–652. https://doi.org/10.1108/JFRA-10-2021-0336
Jin, X., Yu, J., Yuan, G., & Zang, R. (2025). Impact of State-Owned Equity Participation on the Risk-Taking Capacity of Private Enterprises in China: Insights from a Quasi-Natural Experiment. Corporate Governance: An International Review, 33(4), 629–662. https://doi.org/10.1111/corg.12619
Kumar, S., Vivek, Y., Ravi, V., & Bose, I. (2023). Causal Inference for Banking, Finance, and Insurance: A Survey. ArXiv Preprint.
Le, T. N. L., Nasir, M. A., & Huynh, T. L. D. (2023). Capital Requirements and Banks Performance under Basel-III: A Comparative Analysis of Australian and British Banks. The Quarterly Review of Economics and Finance, 87, 146–157. https://doi.org/10.1016/j.qref.2020.06.001
Lusa, L., Proust-Lima, C., Schmidt, C. O., Lee, K. J., Le Cessie, S., Baillie, M., Lawrence, F., Huebner, M., & Initiative, T. of the S. (2024). Initial Data Analysis for Longitudinal Studies to Build a Solid Foundation for Reproducible Analysis. PLOS ONE, 19(5), e0295726. https://doi.org/10.1371/journal.pone.0295726
Magnone, K. Q., & Yezierski, E. J. (2024). Beyond Convenience: A Case and Method for Purposive Sampling in Chemistry Teacher Professional Development Research. Journal of Chemical Education, 101(3), 718–726. https://doi.org/10.1021/acs.jchemed.3c00217
Naili, M., & Lahrichi, Y. (2022a). Banks’ Credit Risk, Systematic Determinants, and Specific Factors: Recent Evidence from Emerging Markets. Heliyon, 8(2). https://doi.org/10.1016/j.heliyon.2022.e08960
Naili, M., & Lahrichi, Y. (2022b). The Determinants of Banks’ Credit Risk: Review of the Literature and Future Research Agenda. International Journal of Finance & Economics, 27(1), 334–360. https://doi.org/10.1002/ijfe.2156
Obilor, E. I. (2023). Convenience and Purposive Sampling Techniques: Are They the Same. International Journal of Innovative Social & Science Education Research, 11(1), 1–7.
Olawale, A. (2024). Capital Adequacy and Financial Stability: A Study of Nigerian Banks’ Resilience in a Volatile Economy. GSC Advanced Research and Reviews, 21(1), 1–12. https://doi.org/10.30574/gscarr.2024.21.1.0346
Omri, M. B. (2022). Understanding the Relationship between Liquidity and Banking Financial Stability in Islamic and Conventional Banks. Journal of Business and Economic Options, 5(1), 39–47.
Oyadeyi, O. O. (2024). Financial Development, Monetary Policy, and the Monetary Transmission Mechanism—An Asymmetric ARDL Analysis. Economies, 12(8), 191. https://doi.org/10.3390/economies12080191
Ozili, P. K., & Iorember, P. T. (2024). Financial Stability and Sustainable Development. International Journal of Finance & Economics, 29(3), 2620–2646. https://doi.org/10.1002/ijfe.2803
Panizza, U. (2023). State-Owned Commercial Banks. Journal of Economic Policy Reform, 26(1), 44–66. https://doi.org/10.1080/17487870.2022.2076678
Polishchuk, Y. (2023). FinTech Future Trends: Secondary Data Review. In The European Digital Economy (pp. 204–220). Routledge. https://doi.org/10.4324/9781003450160-15
Primerano, I., Marchesini, N., Santelli, F., Taddei, L., & Cerbara, L. (2025). Secondary, Longitudinal, and Panel Data in Social Science Research. In Longitudinal Data Infrastructures in Europe: Tools for Open Science in Social Science Research (pp. 19–35). Springer. https://doi.org/10.1007/978-3-032-07005-0_2
Rafique, A., Ali, A., & Audi, M. (2025). Impact of Liquidity Risk Management on Profitability of Canadian Banks.
Rana, J., Gutierrez, P. L., & Oldroyd, J. C. (2023). Quantitative Methods. In Global Encyclopedia of Public Administration, Public Policy, and Governance (pp. 11202–11207). Springer. https://doi.org/10.1007/978-3-030-66252-3_460
Saliba, C., Farmanesh, P., & Athari, S. A. (2023). Does Country Risk Impact the Banking Sectors’ Non-Performing Loans? Evidence from BRICS Emerging Economies. Financial Innovation, 9(1), 86. https://doi.org/10.1186/s40854-023-00494-2
Tran, D., & Nguyen, T. (2025). Capital Buffer and Bank Risk-Taking in Vietnam: The Moderating Role of Capital Regulation and Shadow Banking. Journal of Financial Regulation and Compliance, 33(1), 48–66. https://doi.org/10.1108/JFRC-06-2024-0106
Ullah, S., Ullah, A., & Zaman, M. (2024). Nexus of Governance, Macroeconomic Conditions, and Financial Stability of Banks: A Comparison of Developed and Emerging Countries. Financial Innovation, 10(1), 30. https://doi.org/10.1186/s40854-023-00542-x
Wang, O. (2025). Banks, Low Interest Rates, and Monetary Policy Transmission. The Journal of Finance, 80(3), 1379–1416. https://doi.org/10.1111/jofi.13436
Widarjono, A., Wijayanti, D., & Suharto, S. (2022). Funding Liquidity Risk and Asset Risk of Indonesian Islamic Rural Banks. Cogent Economics & Finance, 10(1), 2059911. https://doi.org/10.1080/23322039.2022.2059911
Wu, X., Jin, T., Yang, K., & Qi, H. (2023). The Impact of Bank FinTech on Commercial Banks’ Risk-Taking in China. International Review of Financial Analysis, 90, 102944. https://doi.org/10.1016/j.irfa.2023.102944
Yahaya, A., Mahat, F., MH, Y., & Matemilola, B. T. (2022). Liquidity Risk and Bank Financial Performance: An Application of System GMM Approach. Journal of Financial Regulation and Compliance, 30(3), 312–334. https://doi.org/10.1108/JFRC-03-2021-0019
Zhao, J., & Han, Y. (2025). Interest Rate Fluctuations and Corporate Financial Leverage. Finance Research Letters, 80, 107344. https://doi.org/10.1016/j.frl.2025.107344
Zheng, C., Islam, M. N., Hasan, N., & Halim, M. A. (2022). Does Intellectual Capital Efficiency Matter for Banks’ Performance and Risk-Taking Behavior? Cogent Economics & Finance, 10(1), 2127484. https://doi.org/10.1080/23322039.2022.2127484
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Dadang Agus Suryanto
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
