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Scirj Volume IV, Issue V, May 2016 Edition
ISSN: 2201-2796

The Factors Influencing Credit Quality: Capital Adequacy of Credit Risks Indonesia Banking to Fulfill Their Role in Economy to Transform Risks

Natali Ikawidjaja, Eka Afnan Troena , Muhammad Ali , Abd. Rakhman Laba

Abstract: There is several factors that could influence credit quality in Indonesian banking. Of these factors, capital adequacy and credit risk are two of the major factors that were focused in many studies. This paper reviews prior research on credit risk analysis mainly focusing on structural models. Structural default model used is related with the credit quality of a firm and the firm’s economic and financial conditions as introduced by Merton (1974). This model is, in contrast to the reduced-form models where default is given exogenously. The structural models in this study used the evolution of a firm’s structural variables, such as asset and debt values, to determine the timing of default. This study argued that Merton’s model considers a firm as failure if, at the time of servicing the debt at maturity, its assets are below its outstanding debt. The basic idea is that the firm’s equity is seen as a European call option with maturity T and strike price D on asset value V. The firm’s debt value is the asset value minus the equity value seen as a call option. This method presumes a very simplistic capital structure and implies that default can only occur at the maturity of the zero-coupon bond. This study concludes inter alia that the challenge ahead for Indonesian financial authority now is to appreciate the central position of Indonesia’s banking and finance industries in the country’s ongoing development.

Reference this Paper: The Factors Influencing Credit Quality: Capital Adequacy of Credit Risks Indonesia Banking to Fulfill Their Role in Economy to Transform Risks by Natali Ikawidjaja, Eka Afnan Troena , Muhammad Ali , Abd. Rakhman Laba published at: "Scientific Research Journal (Scirj), Volume IV, Issue V, May 2016 Edition, Page 11-17 ".

Search Terms: Structural model, Credit Quality, Capital Adequacy, Credit Risk, Indonesian Banking

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