​This paper examines relationship balanced credit on supply side and on demand side in the context of Indonesia bank. The objective of the paper is to examine the behavior of Indonesia banks in managing their supply side into demand side of balance credit. Our empirical results show that the Indonesian banking generally exhibits prudent behavior by increasing capital ratios or funding liquidity in response to an increase in liquidity risk, as measured by the financing gap as proxied of demand side of balance credit. However, a more detailed analysis reveals that big banks tend to reduce their regulatory capital when they face higher liquidity risk. These findings hold true regardless of whether we employ the generalized method of moment estimation or the two-stage least squares estimation. Additionally, we find evidence suggesting that balanced credit between supply side and demand side were not moving in-line together since the banks are facing dynamics measure of balance sheet component such as liquidity, deposit and capital, and is affecting by fundamental factors of the economy.

Keywords: capital, liquidity creation, banking, panel data