Judul: Determinants of Profitability of Foreign Custodian Banks in Indonesia (Study on Foreign Custodian Banks for the 2015-2020 Period)
Abstrak: Since the enactment of banking liberalization in 1999 to facilitate the entry of foreign capital into the country, the role of foreign banks has increasingly enlivened the Indonesian banking industry. This study aims to explain the application of risk management in Foreign Custodian Banks (BAK) in mitigating potential market risk (exchange rate risk and interest rate risk) and liquidity risk; analyze the effect of changes in external and internal factors on the overall profitability of BAK; and formulate managerial implications for the influence of changes in external and internal factors at BAK. This research was conducted on three BAK in Indonesia which were selected purposively with the consideration that they could represent the activities of Foreign Custodian Banks in Indonesia because they have a significant volume of foreign exchange transactions. implementing market risk and liquidity risk management in an effective, robust and reliable manner, as well as having a significant number of assets under custody (including the big five in Indonesia). The time of this research was conducted during the period 2021-2022 with data processing techniques using panel data regression analysis. The results showed that BAK was able to mapplyeffective risk management as outlined in a risk management framework to facilitate the management of all business activities with the aim of maximizing risk-adjusted returns while remaining within risk-appetite limits.In managing market risk, BAK implements risk management in the form of:LimitMarket Risk,Stress Testing,Value At Risk(VARs),Historical Simulation Modelfor calculationsdaily Value at Risk(dVaR), as well as a sensitivity analysis of interest rate risk (PV 01). In addition, BAK performsback testingon the results of VaR calculations to evaluate the effectiveness of the VaR model. In managing liquidity risk, BAK implements risk management, including:Maximum Cumulative Outflow(MCO) as the main measurement in liquidity risk management; measuring, monitoring and reviewing liquidity conditions on a daily basis through ALCO; and set limitsLiquidity Coverage Ratio(LCR) over the next 30 days in a stress scenario. During the study period, the LCR value maintained by BAK ranged from 174% to 725% so that it can be assessed that the liquidity risk of BAK is relatively low. Based onthe results of the study, the profitability of Bank Indonesia as measured in ROE, is significantly influenced by the independent variable PUAB interest rates, the number of Government Securities owned by foreigners, the balance sheet PDN ratio, the NIM ratio, the LAFCTA ratio, and the Dummy Covid- 19 condition. The panel data regression results show an R2 value of 0.831588 meaning that the goodness of fit of the model can be explained by 83.16%, the remaining 16.84% is explained by other factors outside the model. There is a positive correlation of 0.54300 between the LAFCTA ratio and the Balance Sheet PDN ratio which shows that there is a tendency at one time for BAK to build the position of PDN by increasing the LAFCTA ratio.
Keyword: Panel Data, Custodian Bank, Risk Management, Profitability