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Financial Stability Index for the Financial Sector of Pakistan

1
Faculty of Management and Social Science, Capital University of Science and Technology, Islamabad 44000, Pakistan
2
College of Finance, Nanjing Agricultural University, Nanjing 210095, China
3
CEFAGE Research Center, University of Évora, Évora 7000-812, Portugal
*
Authors to whom correspondence should be addressed.
Economies 2019, 7(3), 81; https://doi.org/10.3390/economies7030081
Received: 28 April 2019 / Revised: 11 July 2019 / Accepted: 24 July 2019 / Published: 13 August 2019
(This article belongs to the Special Issue Macroeconomics and Monetary Policy)
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Abstract

This study aims to develop a financial stability index for the Pakistani financial sector by using the financial reports for the period of 2001–2011. Specifically, we constructed three different classes of indices in this study based on a variance-equal weighted approach, a linear probability approach, and a logistic approach. We also assessed the prediction accuracy of the financial stability index. All indices indicated that profitability, liquid liability to the liquid asset, non-performing loan, uncovered liabilities, interest spread and inter-fund to liquid liabilities variables contribute significantly to the determination of financial stress of commercial banks. We also compared the results of indices computed with different methodologies—among them was the index constructed by employing coefficients of the logistic model and which performed outstandingly in predicting distressed and non-distressed banks. Moreover, the findings of this study suggest that in regard to return on assets and return on equity, when employed in a stepwise manner for developing the financial stability index, the results are similar in the sense that both profitability indicators have the same behavior. Finally, we conclude that the financial stability indices developed in this study could help decision makers to detect and avoid instability in the future. View Full-Text
Keywords: financial stability index; financial sector; financial stress; financial crises; financial stability financial stability index; financial sector; financial stress; financial crises; financial stability
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Babar, S.; Latief, R.; Ashraf, S.; Nawaz, S. Financial Stability Index for the Financial Sector of Pakistan. Economies 2019, 7, 81.

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