Abstract:
In this the findings were how macroeconomic factors affect financial risk in the Pakistani banking sector, especially credit and liquidity risk. Proper evaluation has been done about the relationships between exchange, inflation , interest, and GDP growth. Panel data was used and a total of 23 banks were selected in Pakistan. Our research offers a complicated view. GDP growth and credit risk are negatively related to credit risk , indicating that economic growth reduces the ability of people’s ability to repay loans. Iinterest and inflation have positive impact on credit risk, emphasising the difficulties lending in high-interest rate or inflationary environments. Similarly exchange rates have a negative effects on credit risk. Liquidity risk also shows some what similar results like credit risk. GDP growth shows a negative correlation. While, inflation and interest rates have a positive impact, showing that cash flow management is difficult when prices or borrowing costs increases. In the last to note that exchange rates have positive correlation with liquidity risk, suggesting that currency up and down may make liquidity issues worse. This study increases our understanding of the dynamics of financial risk in the specific circumstances of the banking industry in Pakistan. Our research shows the complex connection between macroeconomic variables and credit and liquidity risk, providing important recommendations for risk management strategies and policy initiatives specific to the unique conditions of Pakistan's financial landscape.
