Bank capital and bank lending in the Indonesian banking sector

We used bank-level data of Indonesian commercial banks to examine the role of bank capital in bank lending. Indonesian commercial bank capitalization has improved with the implementation of bank restructuring programs after the Asian financial crisis. The capital adequacy ratio has returned to a sound level; however, bank loan disbursement continues to remain low. We examine the bank lending channel in Indonesian banks and investigate the effects of monetary policy on bank lending through bank capital. The results indicate that a well-capitalized bank can increase its provisions of bank loans while still not responding to monetary policy, excepting non-forex banks.