Dewi Sri Maulydia, Ririt Iriani Sri Setiawati

Analyzing the impact of risk profile on financial performance in banks: Moderating effect of good corporate governance

Introduction

Analyzing the impact of risk profile on financial performance in banks: moderating effect of good corporate governance. Analyze the impact of credit, operational, and liquidity risk on Indonesian bank financial performance (2019-2024), moderated by good corporate governance (GCG). Findings show GCG weakens operational risk's negative effect, highlighting suboptimal risk management.

Abstract

The restrictions on economic activity during the COVID-19 pandemic harmed banking stability in Indonesia. This is reflected in the decline in banks' financial performance in 2020 due to high losses on various risk profiles. These risks do not only occur under certain conditions, such as a pandemic, but are also inherent in the bank's business activities. Therefore, this study analyzes the impact of credit risk, operational risk, and liquidity risk on bank financial performance in 2019-2024, involving GCG as a moderating variable. The purpose of this analysis is to provide an overview of the quality of risk management in commercial banks in Indonesia. The object of this research is commercial banks listed on the IDX. The research sample consisted of 15 banks, selected through purposive sampling. The data were analyzed using panel data models and moderated regression (MRA). The results showed that credit risk and operational risk had a negative effect, while liquidity risk did not affect bank financial performance. GCG weakens the negative relationship between operational risk and financial performance, but does not moderate the relationship between credit risk and liquidity risk. The findings suggest that the risk management of commercial banks in Indonesia is suboptimal, particularly in terms of credit risk and operational risk. Tighter supervision by GCG is also necessary to mitigate the adverse effects of risk.

Review

This study tackles a highly pertinent issue concerning banking stability in Indonesia, particularly in the aftermath of the COVID-19 pandemic. By examining the impact of credit, operational, and liquidity risks on financial performance, and incorporating good corporate governance (GCG) as a moderating factor, the paper offers valuable insights into the resilience and risk management practices within commercial banks. The focus on the 2019-2024 period provides a contemporary lens on an evolving economic landscape, significantly contributing to the literature on financial sector health in emerging markets and offering critical implications for both researchers and practitioners. The research employs panel data models and moderated regression analysis on a purposively selected sample of 15 commercial banks listed on the IDX. The findings reveal that credit and operational risks have a negative impact on financial performance, while liquidity risk shows no significant effect. A key discovery is that GCG weakens the adverse relationship between operational risk and financial performance. However, GCG does not appear to moderate the relationship for credit or liquidity risks. These results lead the authors to conclude that risk management in Indonesian commercial banks is "suboptimal," especially concerning credit and operational risks, underscoring the necessity for tighter GCG supervision. A significant strength of this study lies in its timely relevance and the practical implications it draws for regulators and banking practitioners in Indonesia. The nuanced finding that GCG specifically moderates operational risk, but not credit or liquidity risks, is particularly interesting and invites further exploration into the distinct mechanisms through which corporate governance influences different risk types. While the methodology appears suitable for the stated objectives, the relatively modest sample size of 15 banks, even if purposively selected, might warrant cautious generalization across the entire Indonesian banking sector. Future research could potentially expand the sample, delve deeper into the specific components and measurements of GCG, and further investigate the reasons behind GCG's differentiated moderating influence to provide a more comprehensive understanding of effective risk governance.

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