Abstract
In Indonesia, the Bank Soundness Index (BSI) serves as an early warning instrument for assessing the stability of Conventional Commercial Banks (CCBs) and Islamic Commercial Banks (ICBs). This study develops the BSI employing the Generalized Dynamic Principal Component Analysis (GDPCA) methodology and incorporates the fundamental indicators from the Financial Soundness Indicators released by the IMF. The BSI for CCBs is formulated using three primary components, with the Operating Expense to Operating Income ratio assigned the greatest weight. Likewise, the BSI for ICBs is constituted by three primary components, with the Liquid Asset ratio carrying the greatest weight. The developed BSI accurately reflects Indonesia’s macroeconomic dynamics, evidenced by its correlations with macro financial variables, specifically the credit-to-GDP ratio and the third-party funds-to-GDP ratio, thereby affirming its efficacy as a macro-level banking stability monitoring instrument for the central bank.