DefinePK

Abstract

The stability of the financial system has been becoming increasingly important regarding institutional, structural and macroeconomic aspects on a national and worldwide scale. It is impossible to imagine a world without financial institutions particularly banks which take in funds, pool them and lend to other who need funds. As a result, it is thought to be essential to link a financial system's liquidity position to assess the stability and soundness of that sector. The primary purpose of this research is to examine the impact of bank-specific (internal) and macroeconomic (external) variables on the liquidity of commercial banks in Pakistan. The study has collected data for bank-specific variables from the financial audited reports of commercial banks, while data for macroeconomic factors is taken from Work Bank Indicators from 2014-2023. Empirical data supports that liquidity of commercial banks have been improved during the Covid-19 Period, however, the capital adequacy ratio, inflation and bank’s leverage have a negative significant influence on the commercial banks liquidity. The study also suggests that the dollar exchange rate has a direct positive influence on the liquidity of commercial banks. However, the bank’s size and government deficit financing have an insignificant impact on the liquidity. The study contributed that banks should adopt comprehensive risk management practices that account for both macroeconomic and bank-specific risks. In this regard, the implementation of stress testing and scenario analysis my help banks prepare for adverse economic conditions and mitigate liquidity risks.