Financial Risk Management In Banking: A Key Mediator In Bank Competition And Liquidity Creation

Abstract

The study examines the impact of bank competition on liquidity creation and the mediating role of financial risk management. The simple regression technique is employed to test the hypotheses. The time series data is gathered from the financial statements of the conventional banks in Pakistan from 2004-2022. The Thomson Reuters economic data stream is used for data collection. The findings suggest that bank competition has a positive significant impact on liquidity creation in Pakistan. This means that the higher competition among conventional banks results in liquidity creation. The more the banks compete, the more the banks create liquidity and boost economic growth. The findings of the study align with the competition stability theory. The State Bank of Pakistan must effectively use the monetary policy rate to control the amount of liquidity creation in the economy. The extremes of liquidity creation, either the highest or lowest, harm the bank's performance and raise the risks for the banks.