| This paper analyzes several factors that may determine capital buffer of Indonesian banks. Using monthly data of 99 commercial banks during the period 2004-2007, we highlight that excess capital can be explained by bank’s specific, business cycle, regulatory and institutional variables. Moreover, we find evidence that bank capital buffer is procyclical. These finding becomes different, if we divide banks into two sub-groups according to bank size and market involvement. More importantly, larger banks and listed banks more involved in market activities, tend to increase their capital buffer during economic booms, but reduce it during economic downturns. These findings have regulatory implications for the Basel II implementation in Indonesia, notably in solving its procyclicality. For instance, small banks consolidations and supporting banks to more involve in market activities, as well as market discipline enforcement, become necessary. This paper also reveals that higher non-interest income enhances capital buffer formation. |