Macroprudential Analysis of Financial Crisis Impacts on Banks’ Soundness: Evidence from Pakistan

Abstract

The global financial crisis not only affected the US financial system, but due to contagion effects and global economic interdependence of regions, it has become the global phenomenon for developed as well as developing countries. Pakistan financial sector was also affected by the shocks of global financial crisis; particularly, its banking industry suffered the most. The objective of this paper is to examine the impact of 2007–2008 global financial crisis shocks on the soundness of banks operating in Pakistan with the application of macroprudential tool “stress test.” Macroprudential analysis uses a variety of stress-testing techniques to gauge the financial system’s resilience to shocks, and Credit Lyonnais Securities Asia (CLSA)-stress test is one of them. This study applies a strict Pass/Fail test system called the CLSA-stress test. The results show that global financial crisis has shown adverse effect on banks’ soundness during the crisis period (2007–2009) as compared to postcrisis period (2009–2012).

Appendices

Appendix 1: Bankwise CLSA Test Scores

Bank	Stress-testing crisis period 2007–2009				Stress-testing postcrisis period 2009–2012
	Stress test results actual CLSA criteria		Stress test results adjusted criteria		Stress test results actual CLSA criteria		Stress test results adjusted criteria
Public sector commercial banks
First Women Bank Limited	5	Passes the test	7	Passes the test	4	Passes the test	6	Passes the test
National Bank of Pakistan	4	Passes the test	4	Passes the test	5	Passes the test	5	Passes the test
Sindh Bank Ltd.	1	Passes the test	2	Passes the test	2	Passes the test	4	Passes the test
The Bank of Khyber	6	Passes the test	6	Passes the test	5	Passes the test	5	Passes the test
The Bank of Punjab	8	Passes the test	7	Passes the test	6	Passes the test	4	Passes the test
Local private banks
Al Baraka Islamic Bank B.S.C. (E.C.)	6	Passes the test	7	Passes the test	5	Passes the test	6	Passes the test
Allied Bank of Pakistan Ltd.	2	Passes the test	0	Passes the test	3	Passes the test	2	Passes the test
Askari Commercial Bank Ltd.	4	Passes the test	5	Passes the test	4	Passes the test	4	Passes the test
Bank Alfalah Ltd.	5	Passes the test	5	Passes the test	5	Passes the test	6	Passes the test
Bank AL Habib Limited	2	Passes the test	4	Passes the test	3	Passes the test	4	Passes the test
BankIslami Pakistan	1	Passes the test	2	Passes the test	3	Passes the test	2	Passes the test
Dawood/Burj Bank	0	Passes the test	−1	Fails the test	1	Passes the test	0	Passes the test
Dubai Islamic Bank	6	Passes the test	6	Passes the test	5	Passes the test	4	Passes the test
Emirates Global Islamic Bank	0	Passes the test	−2	Fails the test		NA		NA
Faysal Bank Limited	2	Passes the test	3	Passes the test	3	Passes the test	4	Passes the test
Habib Bank Limited	6	Passes the test	5	Passes the test	5	Passes the test	6	Passes the test
Habib Metropolitan Bank Limited	4	Passes the test	3	Passes the test	5	Passes the test	6	Passes the test
KASB Bank Limited	2	Passes the test	1	Passes the test	1	Passes the test	3	Passes the test
JS Bank P.S.C.	3	Passes the test	4	Passes the test	4	Passes the test	5	Passes the test
Meezan Bank Limited	7	Passes the test	7	Passes the test	6	Passes the test	8	Passes the test
Muslim Commercial Bank Limited	1	Passes the test	3	Passes the test	2	Passes the test	4	Passes the test
NIB Bank	0	Passes the test	2	Passes the test	1	Passes the test	0	Passes the test
SAMBA Bank	5	Passes the test	5	Passes the test	3	Passes the test	4	Passes the test
Silk Bank	2	Passes the test	3	Passes the test	1	Passes the test	2	Passes the test
Soneri Bank Limited	6	Passes the test	7	Passes the test	4	Passes the test	3	Passes the test
Standard Chartered Bank	5	Passes the test	5	Passes the test	2	Passes the test	4	Passes the test
Summit Bank	5	Passes the test	3	Passes the test	3	Passes the test	4	Passes the test
United Bank Limited	1	Passes the test	3	Passes the test	2	Passes the test	2	Passes the test
Foreign banks
Bank of Tokyo-Mitsubishi Limited	7	Passes the test	7	Passes the test	5	Passes the test	6	Passes the test
Barclays Bank PLC	3	Passes the test	3	Passes the test	2	Passes the test	2	Passes the test
Citibank N.A.	4	Passes the test	5	Passes the test	3	Passes the test	2	Passes the test
Deutsche Bank AG	2	Passes the test	3	Passes the test	4	Passes the test	3	Passes the test
HSBC Bank Middle East	5	Passes the test	3	Passes the test	3	Passes the test	5	Passes the test
Industrial and Commercial Bank of China	8	Passes the test	7	Passes the test	6	Passes the test	5	Passes the test
HSBC Oman SAOG	1	Passes the test	0	Passes the test	2	Passes the test	1	Passes the test
Specialized banks
IDBP	0	Passes the test	−4	Fails the test	0	Passes the Test	1	Passes the test
Punjab Provincial Cooperative Bank	0	Fails the test	0	Passes the test	1	Fails the Test	2	Passes the test
SME Bank Limited	2	Passes the test	1	Passes the test	1	Passes the Test	2	Passes the test
Zarai Taraqiati Bank Limited	0	Passes the test	−2	Fails the test	0	Passes the Test	0	Passes the test

Appendix 2: CLSA Scoring Actual Criteria

	Rationale/scoring
	+1	−1
Capital strength ratios (%)
Capital adequacy ratio	>= 08	<08
Equity/assets	>10	<07
NPLs l (SE + accumulated provisions)	>15	>33
Asset quality ratios (%)
Long growth 2 years	<17	>23
Long growth 5 years	<17	>23
Total provisions/total loans	>05	<02
NPLs/total loans	<02	>05
Efficiency ratios
Cost to deposits	<0.9	>1.1
Cost to income (%)	<30	>40
Staff cost per employee	<0.9	>1.1
Liquidity ratios (%)
Loan to assets	<60	>70
Liquidity ratio	>35	<25
Customer deposits/total liabilities	>90	<80

Appendix 3: CLSA Scoring Adjusted Criteria

	Rationale/scoring
	+1	−1
Capital strength ratios (%)
Capital adequacy ratio	>16	<08
Equity/assets	>10	<02
NPLs l (SE + accumulated provisions)	>23	>80
Asset quality ratios (%)
Long growth 2 years	<26	>42
Long growth 5 years	<26	>42
Total provisions/total loans	>08	<03
NPLs/total loans	<05	>18
Efficiency ratios
Cost to deposits	<0.2	>0.8
Cost to income (%)	<40	>65
Staff cost per employee	<0.2	>0.8
Liquidity ratios (%)
Loan to assets	<50	>75
Liquidity ratio	>56	<45
Customer deposits/total liabilities	>86	<74