The Financial Stability Spectrum of Pakistani Banks: Evidence from Advanced Z-Score Assessment

Abstract

This study investigated the financial stability of the commercial banks in Pakistan by using Z-score as the measure of the financial soundness. For the purpose of analysis, the data of 21 commercial banks in taken over the period 2007-2022. The study is based on the ranking of the banks according to their financial stability scores as measured by the Z-score. According to that ranking the classification of banks is done into three zones which includes green, grey and red zone banks to measure the relative levels of risk and stability within the banking sector. Next, the year wise average stability of banks is examined to highlight the changing financial vulnerabilities of the sampled banks over the year. Findings reveal that the banking that few of the banks in Pakistan are moderately stable and are employing risk management techniques and maintain capital buffers to withstand the financial shocks. Few of the banks lie in the green zone which are strongly stable and taking measure to sustain the financial shocks. Further, the banking sector showed relatively strong financial stability during the early years of the study, particularly in 2012, while a gradual decline in financial stability was observed after 2017. The study provides a comprehensive assessment of financial stability trends over a long period. The findings are useful for regulators, policymakers, investors, and bank management in identifying emerging financial risks and designing appropriate strategies to strengthen the banking sector.