Day 2 Example of Introduction3

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RESEARCH PROPOSAL

PERFORMANCE OF MARKET DISCIPLINE DURING USA CRISIS:EVIDENCE FROM INDONESIAN STATE-OWNED BANKS

Erie Febrian, SE, MBA, M.Comm, PhD

1 Research Background

Deposit insurance may be useful in preventing bank runs (Diamond &Dybvig, 1983) andimproving risk sharing (Niinimaki, 2003). However, Merton (1977)argues that deposit insurancemay also encourage banks to be more risk taker. Some scholars like England (1991) further explainthat presence of the high deposit insurance ceiling as well as the protection of the above the limitdeposits have made depositors almost insensitive to bank risk. Depositors are believed to beindifferent to banks fundamentals and the associated potential risk to their deposits, as they trusttheir government to ensure the safety of their deposits (Inakura, Shimizutani, &Paprzycki, 2005;Demirguc-Kunt, 1998a, 1998b, and 2000a). This depositors insensitivity worsened the moralhazard consequences of deposit insurance, inducing banks to engage in high-risk activities, which

in turn boost their default rate (Grossman, 1992; Wheelok, 1992; Thies &Gerlowski, 1989; andDemirguc-Kunt&Detragiache, 2002).

Studies conducted on banking crises have also ended up with some proposed solutions that mightbe effective in preventing the crises from reoccurrence. Among some of the popular suggestedinstruments, the capability of non government agents to control bank risk-taking, i.e. marketdiscipline, has increasingly attracted both policy-makers and economists. Markets role instimulating appropriate banks risk taking behavior becomes more and more significant. This facthas partly accounted for the growing policy-makers preference to and economists emphasis onmarket discipline (See, e.g., Calomiris, 1999). The market discipline works through a mechanism,in which depositors, bond-holders, and shareholders will punish risky banks by using their marketpower. Most likely depositors will withdraw their deposits from, or will ask for high deposit

interests to risky banks. Similarly, bond-holders and shareholders will consequently demand asuitable risk premium to compensate extra risk they will bear (Hosono, 2005).

The above discussion has shown that many studies have been done to explain conflicting impacts ofmarket discipline and deposit insurance toward bank risk-taking behavior. However, there have beeninsufficient studies that cover issue on the impact of limited deposit insurance on depositorsbehavior in government-owned banks. Particularly, the question on the effect of deposit insuranceon the behavior of depositors in chastising state-owned bank risk taking during USA Crisis stillneeds to be answered.

This research is initiated to fill in the above concern. The study will conduct an empirical test onthe hypothesis that risk of state-owned bankhad influenced depositors in Indonesia during the

period of USA Crisis, 2008.9 2010.12. Right after the crisis spread globally, the Government ofIndonesia increased the ceiling of guaranteed bank deposit by 2,000%. This research also willinvestigate whether market discipline works before the crisis, period of 2006.1 2008.8, using thedataof Indonesian state-owned banks.


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Work Plan forPostdoctoral Research


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Erie Febrian, SE, M.Comm, PhD

A. The Activities

1. Conduct literature study in the fields of Market Discipline, Risk Management, and Banking.2. Jointly write one or possibly extended to two articles in the area of Market Discipline, Risk

Management, and Banking, with a senior lecturer or Professor at the Heriot WattUniversity.

3. Help develop joint academic program for Master and Doctoral Programs between theFaculty of Economics & Business Universitas Padjadjaran and the School of Managementand Languages, Heriot Watt University.

B. The Impact

Results of thePostdoctoral Researchand other academic activities at the School of Management andLanguages include:1. A joint publication in an International Journal;2. A Double Degree/Joint Degree in Masters;3. A Sandwich Program in Doctoral Degree

C. The schedule

First Month(weeki)

Second Month(weeki)

Activities 1 2 3 4 1 2 3 4

Literature study

Data Gathering

Empirical Test

Writing the Article

Developing the Joint Academic Programs

Documents

Day 2 Example of Introduction3