Bank Stability Index Determinants: A PCA approach

Abstract

The current study document the development of bank stability index (BSI) on basis of three dimensions loan loss provision, capital regulation standard and profitability. First the study has developed BSIindex using PCA approach then each dimension of BSIindex has been tested separately to find the robustness of results. For this purpose Twenty two (22) conventional banks and four (4) Islamic bank of Pakistan were taken with data set taken from year 2007 to 2017. The results indicated that CIR (cost to income ratio) and HHI (herfindahl index) has significant and negative impact on both BSI index and BSILLP(loan loss provision) index (dimension with maximum eigenvalues as per PCA) whereas in presence of interest rate the direction of CIR changes from negative to positive while the direction of HHI remains the same. The higher interest rate offset the cost again income but unable to reduce the impact of market competition. Moreover, this the very study in context of Pakistan which has developed a BSIindex and find the determinants of stability index.