Interrelationship Between Basel Accords Regulations, Risk, and Banking Performance: An Empirical Analysis of Pakistan Top Three Banks

Abstract

This project analyses the Basel Accords rules, the banking risk and the financial performance in Pakistan with a particular interest of three leading commercial banks, which include Habib Bank Limited (HBL), United Bank Limited and National Bank of Pakistan (NBP). They are suitable to be compared because these banks control a major share of the banking sector in Pakistan and work under the same regulatory provisions as introduced by the State Bank of Pakistan (SBP). The overall aims of the research are to understand how Basel regulations have influenced the risk management practices, to determine the connection between risk indicators and bank performance, to compare the risk exposure and performance of HBL, UBL and NBP, and to discuss how Basel Accords have influenced the financial constancy of the banking sector in Pakistan. The proposed research design will be quantitative and comparative research design based on secondary data obtained through audited annual reports and Basel III capital and liquidity disclosures of the chosen banks in 2023 and 2024. The most important regulatory variables are the Capital Adequacy Ratio (CAR), Risk-Weighted Assets and Liquidity Coverage Ratio (LCR). Risk indicators are Non-Performing Loan (NPL) ratio, liquidity ratio and operational risk proxies and performance measures are Return on Assets, Return on Equity (ROE) and Cost-to-Income Ratio. The analysis of the empirical data shows that the three banks meet the requirements of Basel III capital and liquidity requirements, and all ratios are much higher than the minimum ratios stipulated by SBP. This proves that Basel III application has enhanced the overall resilience and solvency of banking sector in Pakistan. The analysis however indicates that there is a big difference in the effectiveness of banks in using capital and liquidity to address the risk and generate profitability. UBL has the best balance between regulatory compliance and financial performance. It captures excellent increases in capital adequacy and continues to record low credit risk and record the highest profitability amongst the three banks. HBL has a consistent performance with average exposure to risk, which is indicative of a conservative and sustainable development strategy. Conversely, NBP has extremely high capital and liquidity buffer that increase stability but negatively impact on profitability and efficiency. The other reason that NBP is prone to greater credit risk is the high rate of non-performing loans that are mainly due to the exposure to the public sector.