Capital Adequacy, Loan to Deposit Ratio, and Financial Distress Risk in the Banking Sector

Abstract

This study aims to evalue and determine the extent to which the capital 
adequacy ratio (CAR) and the loan to deposit ratio (LDR) affect the potential 
for financial distress faced by banking companies listed on the IDX during the 
period 2021 to 2024. This study is based on concerns about the potential for 
increasing the risk of financial distress in the banking environment, especially 
as a consequence of post pandemic global economic uncertainty and volatility 
in bank operational performance. The two main independent variables tested 
are CAR and LDR, while the dependent variable, financial distress, is 
measured through a dummy variable approach (0 and 1) classified based on 
profitability thresholds. A review of previous research identified that CAR 
tends to show an inverse (negative) relationship on financial distress. It’s 
hoped that the findings of this study can provide practical contributions for 
bank managers and investors as a basis for evaluate the level of financial health 
of the bank and estimate the risk of bankruptcy the may occur.