Does Bank Size and Funding Risk Effect Banks’ Stability? A Lesson from Pakistan

Abstract

The purpose of this research is to address the two important questions. Does bank size effect bank stability? Does funding risk explain bank stability? For this purpose, we have obtained a balanced panel data from the banking sector of Pakistan. The sample data consist over five Islamic and nineteen conventional banks from 2007 to 2015. The results suggest that bank size has a negative effect on stability under Z-score model, while a positive relationship was found when stability is measured through risk-adjusted return on assets (RAROA) and risk-adjusted equity-to-asset ratio (RAEA). Moreover, funding risk has a positive relationship with bank stability under all three stability models. The results obtained from robustness check analysis confirm the strength of our findings, when inflation, financial development and GDP were used as controlled variables. Additionally, the impact of inflation and GDP on bank stability is negative, while a positive relationship is reported between bank stability and financial development under all three models. Overall, present research is a first attempt to empirically analyse the size–stability and funding risk–stability relationship in the banking sector of Pakistan.