Determinants of banks stability: evidences from Nepalese commercial banks

Abstract

The main aim of this study is to investigate the factors that determine the stability of commercial banks in Nepal. More specifically, the study focuses on the correlations that exist between different banking measures and the collective influence that these metrics have on financial stability and performance. In this research, panel data analysis is used to evaluate the impact that several variables, including capital ratio, credit risk, bank size, liquidity risk, GDP growth and inflation, have on the stability of banks. The findings indicate that the stability of a bank is highly influenced by factors such as capital ratio, credit risk and liquidity requirements. It is surprising to learn that the size of a bank has a negative influence on stability, which suggests that bigger banks may have more difficulties in their operations. There is a modest association between bank stability and external economic indicators like GDP growth and inflation, which suggests that internal management practices have a more significant influence in the stability of the economic system. When it comes to safeguarding the stability of banks, the report highlights the need of having robust capital buffers, practicing cautious risk management, and implementing efficient liquidity methods. The study underscores the importance of strong capital buffers, prudent risk management, and effective liquidity strategies in ensuring bank stability. It highlights the necessity for banks to remain vigilant to external economic shifts while focusing on strengthening internal practices. These findings provide valuable insights for policymakers and banking institutions in Nepal, emphasizing the need for robust regulatory frameworks and internal management strategies to bolster the resilience of the banking sector. Policymakers are advised to consider these findings when formulating regulations to ensure a stable banking environment. Additionally, the study suggests that banks focus on internal practices and health to navigate economic conditions successfully. Future research could explore the causal relationships between these variables and bank stability, and comparative studies in different economic contexts could help determine the universality of these findings and inform adaptable strategies.

Keywords: Bank stability, capital ratio, credit risk, bank size, liquidity risk, GDP growth, inflation, risk management