Financial Regulations, Profit Efficiency, and Financial Soundness: Empirical Evidence from Commercial Banks of Pakistan

Shumaila Zeb and Abdul Sattar
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Shumaila Zeb: Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad campus, Islamabad
Abdul Sattar: Assistant Professor, Bahria University, Islamabad

The Pakistan Development Review, 2017, vol. 56, issue 2, 85-103

Abstract: The purpose of this paper is threefold. First, it measures profit efficiency and financial stability of commercial banks of Pakistan. Second, it empirically estimates the effect of the already implemented financial regulations on the profit efficiency and financial stability of banks. Third, it examines the differential effect of financial regulations on profitability and financial soundness across bank size. To carry out the empirical analysis, a balanced bank-level panel data covering the period 2008-2014 is used. To gauge the profit efficiency of commercial banks, Data Envelopment Analysis (DEA) is utilised, while, to proxy the financial soundness, the Z-score is calculated for each bank. The panel regression approach is used to examine the effects of financial regulations on the profit efficiency and financial soundness of banks. We find that the financial regulations enforced by State Bank of Pakistan (SBP) have significant impacts on the profit efficiency and financial stability of banks. The results indicate that the non-performance loans to assets ratio (NPLL) and the reserve ratio (RR) impact positively, whereas, the liquidity ratio (LIQR) and the loans to deposits ratio (LODEPOSIT), significantly and negatively affect the profit efficiency of banks. However, only LR and RR are positively and significant related to the financial stability. The results also suggest that the financial regulations have significant differential effects on the profit efficiency and financial soundness of banks across bank size.

Keywords: Profit Efficiency; Financial Soundness; Financial Regulations; Data Envelopment Analysis; Z-Score; Differential Effects (search for similar items in EconPapers)
JEL-codes: C23 E44 G21 G28 (search for similar items in EconPapers)
Date: 2017
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