Interbank Market Beyond Liquidity Coinsurance: Evidence from Indonesia

Abstract

This study aims to examine the advantage of the interbank market beyond the need for a short-term liquidity coinsurance. More specifically, using monthly data of Indonesian banking between December 2014 to June 2023, we examine the impact of interbank lending to the credit supply and the non-bank funding through autoregressive distributed lag (ARDL) model. This study finds that the long-term interbank lending could attract the bank borrowing from the external investors and boost the credit supply to customers, although it has no significant impact for other funding source, particularly the issued securities. Conversely, the short-term interbank lending has no impact toward the credit supply nor the non-bank fundings. The results are consistent for all commercial banks’ core capital categories, including the small-size, the medium-size and the large-size banks. The novel aspect of this work is the segregation of lending maturities between the long-term and the short-term interbank loans and differentiate its impacts, particularly to the credit supply and the non-bank funding. The study proves the function of interbank market beyond the liquidity coinsurance and supports for the interbank market for diversification motives.