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Abstract

This study investigates how foreign bank presence affects financial stability, focusing on the differences between Islamic and conventional banks operating in Indonesia. Using a fixed-effects regression model of panel data of 108 banks over ten years (18 Islamic banks and 90 conventional banks), the Z-score is the dependent variable of stability, and foreign presence is assessed through foreign bank assets (FBA) and foreign bank number (FBN). This research finds that growing foreign bank number (FBN) positively affects stability, while growing foreign bank assets (FBA) negatively affects stability in the short run. In addition, Islamic banks are more stable than conventional banks relative to foreign bank assets, as the adverse impact on conventional banks is 59% larger than the impact on Islamic banks, (interaction coefficient). This study also finds that the equity ratio (EQA) supports stability moderation, and a 10% increase in EQA suppresses approximately 22% of damages from foreign bank assets. Such results lead to three policy recommendations: (1) reconsidering capital requirements for limitations on foreign assets and foreign banks; (2) determining supervisory regimes for Islamic banks based on their inherently stable nature; and (3) online regulated foreign bank growth tracking. The significance of this study is that it provides an empirical contribution to the literature for the first time in an environment where Islamic and conventional banks have the same minimum requirements, while distinguishing foreign presence from foreign assets and international presence in two ways relative to the banking market—assets and numbers—and how foreign bank presence impacts stability.

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