The Impact of Bank Stability and Operational Risk on Bank Performance

Abstract

This study examines the impact of bank stability and operational risk on the performance of scheduled banks in Pakistan over the period 2014–2023. Bank stability is measured using the Z-score, operational risk is assessed via the Basic Indicator Approach (BIA), and bank performance is evaluated using Return on Assets (ROA). Firm-specific control variables, including firm age and firm growth, are also incorporated. Data were collected from the State Bank of Pakistan and the annual reports of scheduled banks, and analyzed using dynamic panel data regression (Arellano-Bond GMM) along with descriptive statistics and correlation analysis. The findings reveal that past performance significantly predicts current profitability, emphasizing the persistence of bank outcomes over time. Contrary to initial expectations, higher Z-scores are associated with lower ROA, suggesting that excessive conservatism may constrain income-generating activities in a highly regulated environment. Surprisingly, higher BIA values show a positive association with performance, indicating that operational scale and income potential may outweigh risks captured by this measure. Firm age positively affects profitability, highlighting the advantages of experience and institutional maturity, while rapid firm growth negatively impacts ROA, reflecting the operational and managerial challenges of aggressive expansion. These results provide important insights for bank managers, regulators, and investors. Banks should balance stability with strategic risk-taking, adopt more nuanced operational risk management practices, and pursue carefully planned growth to sustain long-term profitability. The study contributes to the literature by jointly examining financial stability and operational risk in Pakistan, offering a deeper understanding of their complex effects on bank performance. Limitations and directions for future research are also discussed.