Government intervention, bank ownership and risk-taking during the Indonesian financial crisis

• Indonesian banks with substantial government and private ownership are compared.
• For non-recapitalized banks, ownership is negatively related to credit risk.
• For recapitalized banks, ownership is positively related to overall risk.
• Banks increase overall and credit risks when a deposit insurance scheme is present.
• Banks increase overall and credit risks when a lower capital requirement exists.

The 1997/98 financial crisis forced the Indonesian government to inject capital into selected banks, introduce deposit insurance and change capital requirements. This study investigates the relation between highly concentrated ownership and bank risk-taking using a sample of 52 insured private commercial Indonesian banks during the 1995–2003 period. For restructured banks, ownership concentration is positively related to overall risk, and negatively related to credit and liquidity risks, especially during the relaxed capital adequacy requirement period. Liquidity risk is reduced when the government and owners contribute additional capital, and credit risk is lowered as the government removes bad loans from problematic banks.