Impact of Financial Risk on Financial Performance of Banks in Pakistan; the Mediating Role of Capital Adequacy Ratio

Abstract

Financial risk covers credit risk, liquidity risk and operational risk, which banks face during their operations and these risks have severe impact on profitability of banks. The Basel Committee for Banking Supervision (BCBS) introduces Capital Adequacy Ratio (CAR) to overcome uncertainties/ losses (Risk) to the banks. In this context, the aim of this study is to identify the Impact of financial risk on financial performance of commercial banks in Pakistan with mediating role of Capital Adequacy Ratio (CAR). The findings of the study show that credit risk and liquidity risk have a negative relationship with financial performance, whereas operational risk has a positive relationship with financial performance and capital adequacy ratio of the banks in Pakistan. This study is useful in devising the rules and regulations by the regulators (Basel Committee and State Bank of Pakistan) for risk measurement and management of banks.

Keywords

• Financial risk, Operational risk, Credit risk, Liquidity risk, Capital adequacy ratio, Financial performance