Research on the impact of COVID-19 on the financial system: Evidence from Indonesia

Abstract

This study investigates the financial system vulnerability and pandemic impact on the financial system of Indonesia in 2015–2021. Two kinds of analysis are involved, i.e.: cross-section analysis at a certain point in time and time-series analysis along a certain time-period. To measure the risks, the research employs risk profile and network analysis using the Financial Account Balance Sheet from Bank of Indonesia. The balance sheet of one institutional sector is associated to the balance sheet of another sector from both assets and liabilities, such as corporations, households, and the financial sectors. Afterwards, Difference-in-Differences (DID) method and the macroeconomic linkages exercises the COVID-19 impact on the financial system. The result shows as the key findings that the financial system is more vulnerable during the pandemic for banks, corporations, and governments, indicated by the more declining net-worth, along with the external balance slowdown. Furthermore, the macroeconomic linkages show that during the pandemic, the financial system is more reliant on the banks, government, and the Rest of the World (ROW).