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An Empirical Analysis of Bank-specific and Macroeconomic Determinants of Liquidity in Pakistan
The global financial crisis has had a profound impact on bank performace and has brought the issue of liquidity risk to the forefront. As a result, liquidity risk management has become a topic of considerable interest to financial economists, practitioners, and policymakers. This empirical study aims to examine the impact of bank-specific and macroeconomic variables on the liquidity of 20 commercial banks in Pakistan. The fixed-effects model was used to analyze panel data covering the period 2009-2018. The liquidity ratio approach was used to measure bank liquidity, which calculates bank liquidity based on liquid assets relative to total assets. Empirical results show that bank size, credit risk, and net interest margin have a negative impact on liquidity, while capital adequacy, profitability, management efficiency, and management quality have a positive impact on liquidity. In addition, the study found that the monetary policy rate and the exchange rate have a positive impact on the liquidity of Pakistani commercial banks. The study suggests that the State Bank of Pakistan should take stringent measures to recover funds and reduce liquidity constraints to improve the performance of banks. These findings provide valuable insights into the factors affecting bank liquidity and could inform future policymaking in the banking sector.
Index Terms -- Bank-specific factors, Commercial banks, Fixed-effects model, Liquidity, Macroeconomic variables, Pakistan