Analysis of Key Determinants of Insolvency Risk in Commercial Banks: An Insight from Pakistani Banking Sector

Abstract

Banking organizations operate in an unpredictable and risky environment, necessitating the development of strategies to enhance performance and prevent bankruptcy. This study aims to analyze the factors affecting Pakistan's commercial banks' financial stability, focusing on the key reasons for insolvency risk and the impact of risk on the bank's revenue generation factor. Unsatisfactory risk control strategies can decrease efficiency and lead to insolvency. The study analyzes data from 22 commercial banks using the two-step generalized method to measure strategies to reduce insolvency risk. It reveals that credit risk and loss risk negatively impact financial stability, while liquidity risk positively affects it. Risk management is crucial, and bad loans are affecting performance levels. The income structure of banks also plays a significant role in financial stability. The results were analyzed using graphic and evocative statistics using EViews 9 software. Reducing the nonperforming loans ratio can efficiently regulate performance levels. The research forecasts that nonperforming loans and their provisions, as well as the income structure, have a substantial influence on financial stability. It is necessary to assess risk management methods to mitigate the danger of bankruptcy.