Credit Risk, Liquidity Risk, and Bank Profitability: A Comparative Study of Twin Crises in Pakistan

Abstract

Purpose: Financial crisis 2007-08 and Covid-19 badly hit the financial stability across the world. How credit risk and liquidity risks reacts during these crisis is a catchy question for researchers and specifically it is important to explore in banking sector. So the study mainly focuses the interactional relationship between credit risk, liquidity risk and profitability, whereas interactional risk is considered as endogenous variable.
 Methodology: To explore the relationship, banking sector of Pakistan is taken as sample of the study and data set is taken from 2006 to 2021. SUR model is used to analyse the proposed relationship.
 Findings: In integrated time period a negative Influence of interactional risk is observed with profitability, which depicts as much as high reciprocal risk of credit risk and liquidity risk there will be decrease in the profitability. Reciprocal risk of non-performing loans and advance to deposit ratio influences the profitability negatively. Reciprocal risk influences the profitability positively during financial crisis. After financial crisis interactional risk influences the profitability negatively. During Covid-19 interactional risk is negatively associated with profitability and before Covid-19 interactional risk was found as unrelated.
 Implications/Originality/Value: It’s important to manage the interactional risk to avoid risk and to get maximum profitability.