Financial Risk Management Practices and Their Impact on Banking Stability

 

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FORMOSA NEWS - Purworejo - Financial Risk Management Practices and Their Impact on Banking Stability. This study was conducted by Dwi Irawati from Universitas Muhammadiyah Purworejo, Indonesia, and published in the Formosa Journal of Science and Technology (FJST), Vol. 5 No. 1, 2026.

The research by Dwi Irawati reveals how financial risk management practices particularly credit risk, liquidity risk, and market risk affect the stability of conventional commercial banks listed on the Indonesia Stock Exchange in the post-pandemic period.

Rising Risks in an Uncertain Economic Environment

In the post-pandemic era, Indonesian banks face mounting pressure from multiple directions. While they are expected to continue extending credit to support economic recovery, many borrowers still struggle to meet their repayment obligations. This imbalance has increased credit risk and exposed vulnerabilities in banks’ financial resilience.

In this context, banking stability can no longer be assessed solely through profitability. Instead, it reflects a bank’s ability to manage interconnected financial risks—credit risk, liquidity risk, and market risk—in a disciplined and sustainable manner.

How the Study Was Conducted

The research draws on secondary data from banks’ annual financial statements and official banking statistics published by Indonesia’s Financial Services Authority (OJK). To capture differences across banks and changes over time, the study employs panel data regression analysis, a statistical approach widely used in financial and economic research.

This method allows the researcher to examine how variations in risk exposure influence bank stability across institutions and throughout the post-pandemic recovery period, rather than focusing on a single snapshot in time.

Credit Risk Emerges as the Strongest Determinant

One of the study’s most robust findings is that credit risk has a strong and consistently negative impact on banking stability. Higher levels of non-performing loans are associated with lower stability across banks.

Credit deterioration reduces interest income and forces banks to allocate larger reserves for potential losses, placing sustained pressure on capital adequacy. Over time, this situation undermines investor confidence and increases the likelihood of broader financial stress.

Liquidity Risk: A Delicate Balance

The study also highlights the significant role of liquidity risk, though its effects vary across banks. Insufficient liquidity increases the risk of short-term funding stress, while excessive liquidity can weaken efficiency and long-term performance.

These differences reflect variations in bank size, funding structures, and liquidity management strategies. Large banks with diversified funding sources tend to be more resilient, whereas smaller institutions may face tighter constraints when liquidity conditions deteriorate.

Market Risk Remains Relevant

Market risk—linked to changes in interest rates and broader financial market conditions—also influences banking stability, although its impact is more moderate compared to credit and liquidity risks.

Banks with diversified income streams and effective interest rate management are better positioned to absorb market fluctuations. The findings suggest that while market risk may not be the primary threat, it remains an important factor in overall risk management strategies.

Implications for Banks and Policymakers

The study delivers a clear message for both bank executives and financial regulators: financial risk management is not merely a regulatory requirement but a cornerstone of long-term banking stability.

For bank management, strengthening credit assessment systems, closely monitoring asset quality, and maintaining balanced liquidity policies are critical steps. For regulators, the findings provide empirical support for enhancing prudential supervision and reinforcing policies aimed at sustaining financial system resilience

Author Profile

Dwi Irawati, S.E., M.Si.
Lecturer and researcher at Universitas Muhammadiyah Purworejo, Indonesia.
Research interests include financial management, banking risk management, and financial system stability.
Email: dwi.irawati@umpwr.ac.id

Research Source

Irawati, D. (2026). Financial Risk Management Practices and Their Impact on Banking Stability.
Formosa Journal of Science and Technology (FJST), Vol. 5 No. 1, pp. 383–394.
DOI: https://doi.org/10.55927/fjst.v5i1.399
Official URL: https://traformosapublisher.org/index.php/fjst