The Impact of Financial Regulations on Financial Institutions Insolvency: A Comparative Study on Small, Medium and Large Size Banks in Pakistan

Abstract

Financial regulations are vital source for progress the liquidity and solvency of financial institutions for every country across the globe. The study empirically investigated the effect of financial regulations enforced by state bank of Pakistan (SBP) on individual banks and their banking insolvency. This study employed a sample size of nine commercial banks operating in Pakistan during the period of20l4 to 2019 on a quarterly basis. For categorization of banks, this study applied new· approach of taking commercial banks based on the total assets structure of commercial banks, the range is from small, medium to large banks. The novelty of this study lies in using the ZSCOR to compute the banking insolvency of commercial banks in Pakistan. This study filled the gap by applying the Panel data analysis to describe the relationship between financial regulations and banking insolvency of selected commercial banks. The empirical results expose that an increase in the non-performing loan to total loans can reduce insolvency risk of large, medium as well as small commercial banks. Furthermore, the results also disclose that the capital adequacy ratio is originated to be unimportant with banking insolvency risk for all sample selected commercial banks in Pakistan. For large, medium and small commercial banks, it reasons that loan to deposit ratio decreases as insolvency risk increases. Similarly, liquidity ratio and nonperforming loans to total loans, loan to deposit ratio and reserve ratio have been found to be significant for large commercial banks while the capital adequacy ratio is found to be significant for medium and small banks in Pakistan. The government and the regulatory bodies should recognize the systematic and non-systematic financial institutes inside the state. Keeping in view the financial and regulatory rations for systematically and non-systematically significant commercial banks must be dissimilar.