ASSESSING THE EFFECT OF LIQUIDITY AND CREDIT RISK ON BANKS’ STABILITY

The issue of financial stability is linked with banking stability. Banking stability is a yardstick to determine whether an economy is sufficiently strong enough to withstand any financial challenges. Banking stability in itself relies on parameters of individual banks like liquidity risk and credit risk. The present study is an attempt to study the relation between the two risk factors with stability of Public Sector Commercial banks in India during the period 2009-10 to 2017-18.The study uses Simultaneous Equation Approach and Generalized Methods of Moments approach for analyzing the relationship with credit and liquidity risk and their interaction on bank stability. The study shows that banks stability is significantly influenced by credit risk and liquidity risk along with growth of loan, size of bank, Return on Assets(RoA) and macroeconomic variables i.e. inflation.