Income Diversification, Credit Risk, Liquidity Concentration, and Bank Stability: Testing Competing Risk Transmission Mechanisms in Indonesian Banking

Riohasiholan Sijabat; Nahla Husna Jufri; Muftihaturrahma Salim; Ahmad Rizki Rifani; Wita Juwita Ermawati

doi:10.61255/jeemba.v4i5.1520

Authors

Riohasiholan Sijabat IPB University, Indonesia
Nahla Husna Jufri IPB University, Indonesia
Muftihaturrahma Salim IPB University, Indonesia
Ahmad Rizki Rifani IPB University, Indonesia
Wita Juwita Ermawati IPB University, Indonesia

DOI:

https://doi.org/10.61255/jeemba.v4i5.1520

Keywords:

Bank Stability, Income Diversification, Credit Risk, Liquidity Concentration, System GMM

Abstract

Purpose – This study examines the effects of income diversification, credit risk, and liquidity concentration on bank stability and assesses whether their joint effects reflect compounding or buffering mechanisms in Indonesian conventional banks during 2019–2025.

Design/methodology/approach – The study uses a balanced panel of 38 conventional commercial banks listed on the Indonesia Stock Exchange from 2019 to 2025. The analysis employs Two-Step System GMM, with alternative panel estimators used for robustness checks.

Findings/Results – Credit risk has a negative and significant effect on bank stability (β = −10.03; p < 0.01), while income diversification and liquidity concentration show no significant direct effects. The interaction between credit risk and liquidity concentration is positive and significant (β = 33.79; p < 0.01), whereas the income diversification–credit risk interaction is marginally significant. The three-way interaction is not significant (β = −55.64; p = 0.696), providing no support for either the compounding or buffering mechanism at the simultaneous three-way level.

Originality/Value – This study advances banking-risk research by testing competing interaction mechanisms rather than assuming purely independent or fully interactive risk effects. The findings indicate that risk transmission in Indonesian banks is characterized more by pairwise interactions than by a simultaneous three-way mechanism.

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