Quiet life hypothesis reborn: is “holdinglisation” relevant?

Abstract

Purpose

Quiet life hypothesis (QLH) states that banks with a higher market power will generate high profitability quietly, even though it could cause inefficiency. In the long term, it could turn a high profitability into a lower future profitability. This paper identifies QLH-reborn through the holdinglisation strategy of the Indonesian Government to include all state-owned banks into one holding, hence increasing the market power of Indonesian state-owned banks within ASEAN. Optimum profitability and optimum efficiency are the objectives of the “holdinglisation” idea. Therefore, the purpose of this paper is to analyse the relevance of holdinglisation within the Indonesian banking industry.

Design/methodology/approach

This paper focusses on analysing the efficiency and soundness of four state-owned conventional banks and four state-owned Islamic banks in Indonesia during 2011–2015. Subsequently, this paper analyses the impact of bank effectiveness index and soundness rank on return on average asset (ROAA) and ROAE through the data panel of general least square regression using STATA.

Findings

This paper shows that all state-owned commercial banks in Indonesia during 2011–2015 are efficient and sound. Furthermore, this paper finds that market power (market share for deposit and market share for loans) has an insignificant impact on bank efficiency (BE) index, bank soundness rating, ROAA and EM. Meanwhile, BE index and BS rating have a significant impact on ROAA. Therefore, this paper concludes that holdinglisation regulation as QLH-reborn is irrelevant for Indonesian state-owned banks at this moment.

Research limitations/implications

This paper has a crucial limitation. Holdinglisation as QLH-reborn is irrelevant under the condition that all state-owned commercial banks in Indonesia are efficient and sound. Moreover, this paper contributes another actual empirical study of QLH.

Practical implications

This paper represents a scientific argumentation towards a holdinglisation strategy of state-owned commercial banks in Indonesia. Therefore, this paper could be a scientific reference for the Indonesian Government to improve Indonesian state-owned commercial banks competitiveness in ASEAN.

Originality/value

This paper is urgently needed for the Indonesian banking industry because the Indonesian Government should consider the drawbacks of holdinglisation as QLH reborn to the Indonesian banking industry, such as inefficiency and the risks of financial failure. Moreover, if the bank experiences financial failure, it could have a detrimental and lasting effect on the country’s macroeconomic condition.

Citation

Liem, M.C. (2019), "Quiet life hypothesis reborn: is “holdinglisation” relevant?", Managerial Finance, Vol. 45 No. 2, pp. 278-293. https://doi.org/10.1108/MF-08-2017-0279