Impact of Financial Risk on Financial Performance of Banks in Pakistan; the Mediating Role of Capital Adequacy Ratio

Financial risks, cover credit, liquidity and operational risks, are the risks which banks face during their operations and all these risks have severe impact on the profitability of banks. The Basel Committee for Banking Supervision (BCBS) introduces Capital Adequacy Ratio (CAR) to overcome uncertainties and possible losses (Risk) to the banks. In this context, the aim in this study is to identify impact of financial risk on financial performance of banks in Pakistan with mediating role of Capital Adequacy Ratio (CAR). The findings show that credit and liquidity risks have negative relationship with financial performance, whereas operational risk has a positive relationship with financial performance and capital adequacy ratio of banks in Pakistan. This study is useful in devising the rules and regulations by the regulators (Basel Committee and State Bank of Pakistan) for risk measurement and management by the banking sector.