How does the banking competition affect solvency, liquidity and credit risks in Pakistan?

Abstract

This study empirically examines the relationship between the banking competition and financial sector stability in Pakistan. This study considers 31 banks during the period lasting from 2001 to 2014. The sample period shows that market power of banks is relatively inelastic. In this study, the stability of bank is divided into solvency, liquidity and credibility. The results present that increase in competition is negatively related to stability in solvency and credibility whereas it is positively associated with liquidity of financial institutions. These findings corroborate the competition fragility approach. Another important finding of this study is that the market power of state-owned banks is higher than private and foreign banks. The solvency and liquidity positions of private banks are higher than state-owned and foreign banks. In addition, this study explores that the credit risk of state-owned bank is relatively higher due to higher NPLs than private and foreign banks.