The impact of liquidity risk and credit risk on bank profitability during COVID-19

Abstract

The COVID-19 outbreak caused a massive setback to the stability of financial system due to emergence of several other risks with COVID, which significantly influenced the continuity of profitable banking operations. Therefore, this study aims to see that how differently the liquidity risk and credit risk influenced the banking profitability during Covid-19 (Q12020 to Q42021) than before COVID (Q12018 to Q42019). The study employs pooled OLS, and OLS fixed & random effects models, to analyze the panel data on a sample of 37 banks currently operating in Pakistan. The results depict that liquidity risk has a positive and significant relationship with return on assets and return on equity, but insignificant relationship with net interest margin. Credit risk has a negative and significant relationship with return on assets, return on equity, and net interest margin. The study also applies quantile regression to address the normality issue in data. The quantile regression results are consistent with pooled OLS, and OLS fixed and random effects results. The study makes valuable suggestions for regulators, policymakers, and others users of financial institutional data. The current study will help to set policies for efficient management of LR and CR.