TOO BIG TO FAIL OR TOO RISKY TO LEND? THE NEXUS OF GEARING, LIQUIDITY, AND CREDIT RISK

Abstract

This paper explores the effects of gearing ratio, liquid assets, and bank size on credit risk in the banking industry in Pakistan from 2010 to 2025. To meet the needs of research, secondary data were obtained from authentic sources, namely the State Bank of Pakistan, Pakistan Bureau of Statistics, Ministry of Finance, and the World Bank. The intensity and direction of these relationships are assessed through OLS regression analysis which in its turn is also scrutinized by means of diagnostic tests like Durbin-Watson and R². The findings show that the leverage has a significant positive impact of the credit risk, indicating that the highly geared banks are more risk exposed. Also, liquid reserves are discovered to have a positive and significant impact on the level of credit risk, reflecting moral hazard in the management of liquidity. On the other hand, bank size demonstrates a negative but insignificant effect, suggesting weak scale effects. The findings generate significant insights for regulators and policymakers in formulating efficient credit risk management policies.