Dynamics Of Credit, Liquidity and Solvency Risk: A Multidimensional Panel Approach in Case of Pakistan’s Banking Sector

Abstract

This paper examines the dynamic relationship between credit risk, liquidity risk, and solvency risk in the Pakistani banking sector. The study uses a panel dataset of commercial banks over the period 2012–2023 and applies fixed effects, random effects, and Two-Step System Generalized Method of Moments (GMM) estimators to account for persistence and endogeneity in bank stability, measured by the Z-score. The results indicate significant persistence in bank stability, suggesting gradual adjustment over time. Credit risk and earnings volatility negatively affect stability, while profitability, capital adequacy, and effective risk management improve resilience. Excessive liquidity holdings are found to weaken solvency, particularly under macroeconomic uncertainty. Robustness analysis across pre-pandemic and post-pandemic periods confirms the consistency of the results. Overall, the study provides empirical evidence on the role of risk interactions and key financial indicators in shaping bank stability in Pakistan.