Examining the Relationship Between Banking Competition and Solvency, Liquidity and Credit Risks in Pakistan

Abstract

This study empirically examines the relationship between the banking competition and the risks faced by the financial sector (i.e. solvency, liquidity, and credit risks) considering 31 banks for the period 2001 to 2018. Banks are further sub-divided into three categories i.e. state-owned banks, foreign banks, and private/commercial banks. The results reveal that Pakistan’s banking industry is relatively elastic and an increase in competition is directly associated with solvency risk, liquidity risk and credit risk of financial institutions and these findings corroborate the competition fragility theory. Besides, state-owned banks have a lesser probability to cope with solvency risk, however, foreign banks appear to face the least liquidity risk whereas private banks appear to face the least credit risk among the entire cluster.