Abstract:
This research is designed to provide an analysis of the systemic risk of Islamic banks in Indonesia.
As primary consideration in the systemic risk is the interconnectedness of financial institutions, this research
proposes a novel method to measure the interconnectedness between the stability of Islamic banks by developing
an econometric model for the indicator of individual banks’ soundness. In order to measure of systemic risk, this
research develops a Vector Auto Regression (VAR) econometric model for the z-scores of Islamic banks in order to
analyse the interconnectedness between stability Islamic banks in the data sample and determine the systematically
important bank in the Islamic banking industry afterwards. Based on the VAR model results, the stability of Bank
Syariah Mandiri, as the biggest Islamic bank and the second Islamic bank in Indonesia, in the previous month
consistently influences three other Islamic banks in addition to its own stability. Furthermore, considering the VAR
model is a novel method in measure a systemic risk, this finding also prove that the VAR model is a robust method
as its finding also confirmed by additional information such as total asset and the trajectory of the development of
the Islamic banks in Indonesia.