This research primarily aimed to find out the response of Indonesian banks’ capital ratios to changes in the amount of regulatory capital requirement, investigated the relation between banks’ characteristics to that particular response as well as the effect of capital quality preference to the banks’ risk-based capital ratios under the implementation of Basel II Accord. The data used was secondary data in a form of commercial banks statistics which were obtained from Otoritas Jasa Keuangan (OJK). The method of analysis would be fixed effect Generalized Method of Moments (GMM) with 3 alternative weights: cross-section weight, period weight, and 2SLS weight, and later only one of them which offered the best fit would be selected. The regression result generated by the chosen method then would be analyzed to identify the behavior of capital ratios toward changes in several proposed factors.udBased on analysis using fixed effect Generalized Method of Moments (GMM) with cross-section weight, between 7 proposed factors and capital ratios in this research was proved to have correlations. Capital ratios showed different behaviors toward capital requirement, banks’ size as well as their risk tolerance, dependence on core (equity) capital, and also exposure to market discipline. These findings have implications to the observation of capital regulation in Indonesia.
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