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Risk Management, Capital Adequacy and Audit Quality for Financial Stability: Assessment from Commercial Banks of Pakistan

Hafiz Waqas Kamran, Abdelnaser Omran and Shamsul Bahrain Mohamed-Arshad
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Hafiz Waqas Kamran: School of Economics, Finance and Banking, College of Banking, University Utara Malaysia, Sintok, 06010, Kedah State, Malaysia
Abdelnaser Omran: Faculty of Engineering Sciences, Bright Star University, El-Breqa, Libya
Shamsul Bahrain Mohamed-Arshad: School of Economics, Finance and Banking, College of Banking, University Utara Malaysia, Sintok, 06010, Kedah State, Malaysia

Asian Economic and Financial Review, 2019, vol. 9, issue 6, 654-664

Abstract: The purpose of this study is to examine the effect of bank-based risk measures, country related and international risk factors along with capital ratio and audit quality for stability measures. This article has filled the literature gap while addressing two financial stability measures: Z score through return on assets and return on equity (ZROA and ZROE). A sample of 28 commercial banks is collected from national financial market in Pakistan, with annual observations each year from 2007 to 2016. Panel regression models like ordinary least square (OLS), fixed effect and random effect under robust title are applied to examine the effect of risk factors, capital ratio and audit quality on financial stability (FS). Study finds that bank-based risk factors such as liquidity, credit and operational risk have significant negative influence on both stability measures. Excessive capital ratio seems also to adversely affect financial stability measures. Additionally, higher payments to auditors increases audit quality, resulting in a positive influence on both stability measures. Policy makers, financial analysts and credit officers in banks recommend analysis and review of the relationship between risk factors, capital ratio and audit quality, and the FS of Pakistani commercial banks. However, this work is limited to commercial banks, with no consideration of developed financial institutes and industrial banks. Additionally, there is no methodological application of advanced techniques like GMM.

Keywords: Bank-based risk factors; Capital ratio; Audit quality; Financial stability; Pakistan. (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 (search for similar items in EconPapers)
Date: 2019
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