The Impact of Monetary Policy on Capital Structure, Credit Risk and Bank Profitability in Indonesia

Abstract

This research discusses the impact of monetary policy on bank capital structure, credit risk and bank profitability in Indonesia. It is hoped that the findings of this research can contribute to the development of financial science, especially monetary policy theory and economic policy theory, after going through the process of understanding the variables of monetary policy and macroeconomic policy that influence decisions regarding bank funding patterns, and bank profitability and company financial performance. which maximizes the welfare of its owners and stakeholders.The bank's capital structure can be determined or explained by monetary policy, where if there is an increase in the minimum statutory reserve, central bank interest rates and the Capital Adequacy Ratio (CAR) it will cause a decrease in the level of debt in the bank's capital structure. Bank credit risk cannot be determined or explained by monetary policy. Bank profitability cannot be determined or explained by monetary policy. If there is a change in the debt to asset ratio and debt to equity ratio it will cause a change in bank profitability as measured by Earning Per Share (EPS), Return On Assets (ROA), Return On Equity and Net Internet Margin (NIM), where if there is an increase Debt in the bank's capital structure also contributes to high interest costs reducing which causes a decrease in the bank's income level. If there is a change in Loan Loss Provision (LLP), Non-Performing Loan Gross (NPLG) and Non-Performing Loan Net (NPLN) it will cause changes in bank profitability as measured by Earning Per Share (EPS), Return On Assets (ROA), Return On Equity and Net Internet Margin (NIM), where if there is an increase in bank credit risk, namely problem and bad loans, also contribute to high costs, causing a decrease in the bank's income level, even loss of income.Provides empirical evidence of the research concept (Mendoza & Rivera, 2017) which states that credit risk has a significantly negative effect on profitability. Providing empirical evidence of the research concept (Dang, 2022) states that monetary policy drives bank profitability asymmetrically. Concretely, interest rates (i.e., loan interest rates and policy interest rates) have a positive effect on net interest income, but a negative impact on non-interest income. Banks with more diversified funding patterns will be associated with weaker bank sensitivity financially in facing monetary shocks to limited alternative funding.

Keywords: Monetary Policy, Capital Structure, Credit Risk, Bank Profitability.

DOI: 10.7176/RJFA/14-18-01

Publication date:October 31^st 2023