The Interdependence of Liquidity Risk and Credit Risk in Banks: A Case Study of Pakistan

Abstract

development, and plays an essential role for economic growth of aneconomy. This study examined the relationship between liquidity risk (LR) and credit risk (CR) in the banking sector, using the data of 15 commercial banks of Pakistan over 2002-2016. The study also analyzes the sources of risks on the bank institutional-level and how the relationship between liquidity and credit risk influence to banks. The findings of the study suggest that both risk categories have a reciprocal relationship and also influence banks’ stability. The LR and CR have separately improved the stability of the bank, and the impact of their interaction depends on the overall level of bank risk and can either aggravate or mitigate the default risk.