We empirically estimated equation 5 for all banks, large, medium, small, and Islamic banks through panel regression analysis. The pooled, fixed, and random effects regression was applied to equation 5. The panel regression was repeated for all, large, small, medium, and Islamic banks. The fixed effect was selected on the basis of Hausman test. Table 1 describes the empirical results for all banks, large banks; medium, small, and Islamic banks being selected for empirical analysis.
Table 01
Fixed Effects Estimation for Financial Regulation Effects on Insolvency Risk
Heteroscedasticity robust standard error estimates are used
Note: The table represents the results of panel data regression of all banks, large, medium, small, and Islamic banks. The heteroscedasticity robust White (1980) standard error is used for the estimation of linear panel. The coefficients and standard errors are presented in the table. The Wooldridge test is used for the autocorrelation.
The p values are given in parenthesis. Hausman test is applied to select fixed effect or random affects estimator.
Hausman test p value is also given. *, **, *** present the significance level at 10 percent, 5 percent and 1 percent, respectively.
The above analysis describes overall insolvency risk situation in all banks, which are selected for the analysis. In this way, empirical results based on entire sample information, being used for analysis, once at a time does not precisely describe the need and importance of required component of the analysis. In order to resolve this ambiguity, we classified the entire sample into large, medium, small, and Islamic banks.
The current ratio, loan to deposit ratio, non-performing loan ratio, reserve ratio and Time appears to be economically and statistically significant for all the banks of Pakistan. The current ratio, loan to deposit ratio and non-performing loan ratio appears to be negatively related with
the insolvency risk of banks of Pakistan. The capital adequacy ratio is insignificantly related with all the banks of Pakistan.
Turning into the other samples of the study, some interesting facts were revealed about the financial characteristics being employed in the study. The capital adequacy ratio appears to be negative but significantly related with the medium and Islamic banks of Pakistan. Other things remains constant, one unit change in the capital adequacy ratio of the medium banks decrease the insolvency risk of medium banks by 0.67 units on average. Similarly, increase in the CAR of Islamic banks leads to decrease in the insolvency risk of Islamic banks.
The current ratio appears to be significantly negatively related with the insolvency risk of large and medium banks of Pakistan. The result suggests that this ratio is more important for the large and medium banks. The current ratio is also economically and statistically significant for the Islamic bank as well. The result implies that increase in the current ratio leads to decrease the insolvency risk of large, medium, and Islamic banks. The current ratio of small banks appears to be insignificantly related with the insolvency risk. Similarly, the loan to deposit ratio seems to have negative relationship with the insolvency risk of large and medium banks of Pakistan. Other things remain unchanged; one unit increase in the current ratio of large banks tends to decrease the insolvency risk of the banks by 0.94 units on average. The loan to deposit ratio donot seems to affect the insolvency risk of small banks of Pakistan. The non-performing loan ratio is also negatively related with the insolvency risk of large, medium, small and Islamic banks. The results imply that increase in the non-performing loan ratio tends to decrease the insolvency risk of the banks.
The reserve ratio is found positive and significantly related with the insolvency risk of large, medium and small banks of Pakistan. Other things remains constant, one unit increase in the reserve ratio will increase the insolvency risk of large banks by 0.40 units, medium banks by 0.19 units and small banks by 0.57 units on average. The reserve ratio does not appear to be significantly related with the Islamic banks.
CONCLUSION
The SBP announces a set of guidelines in the form of prudential and financial regulations for the banking industry covering almost every aspect of banking. The study aims to investigate how already implemented financial regulations affect insolvency risk of conventional banks of Pakistan. Our study is important for the policy makers, regulators, and practitioners of Pakistan to obtain the efficacy of already implemented financial regulations as far as insolvency of conventional banks of Pakistan is concerned.
The capital adequacy ratio is found insignificant for insolvency risk of large banks. CAR is also insignificant for insolvency risk of small banks as well but is significant for insolvency of medium banks. The current ratio is also insignificant for insolvency risk of small banks. A higher Reserve Ratio implies greater insolvency risk for all banks. Our results give a fair idea that financial regulations must be implemented keeping a certain criterion in mind like as we distinguished banks in this study on the basis of their total asset structure. It is need of the hour to strengthen the regulatory framework and enhance supervisory capacity for dealing with large banks. Since the analysis reveals that insolvency risk is based on capital adequacy ratio, current ratio and reserves ratio, nonperforming loans to loans ratio and loan to deposit ratio. Therefore, based on findings and conclusions, it is evident that all financial obligations are essential for insolvency risk.
There are different tools that might be used to check insolvency risk of the conventional banks like Capital Adequacy Ratio itself can be used as a tool for measuring insolvency risk of a conventional bank. Few other ratios might be tested in the future like leverage ratio which is a part of Basel III.
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13-BD20-5657
ROLE OF HUMAN RESOURCE MANAGEMENT PRACTICES IN THE