Stability, Funding Risk and Bank Performance: Evidence from Pakistan

Abstract

This study analyzes how banks' stability and funding risk affect their profitability in the case of Pakistan. For this purpose, data from 19 Banks were used from 2000 to 2016. The independent variable was Bank Performance for which Return on Assets was used. The dependent variables were first, Bank Stability, which was calculated as the Z-Score of RoA and Equity to Assets,  and second, Funding Risk, which was calculated as the Z-Score of Deposits to Assets Ratio and Equity to Assets. Our control variables were Bank Size, Credit Risk, Liquidity Risk, Diversification, and Capital to Asset Ratio. Our results indicated that Funding Risk, Liquidity Risk, Credit Risk, and  Bank Size are negatively affecting bank performance whereas bank stability is positively affecting bank performance. From the result of size, we may conclude that in the case of Pakistan, Larger Banks are not getting the benefits of economies of scale. Our findings suggest that policymakers and banking institutions in Pakistan should prioritize efforts to enhance bank stability and mitigate funding risk in order to improve bank profitability.