IMPACT OF BASEL III ON INVESTMENT DECISIONS OF COMMERCIAL BANKS IN PAKISTAN

Abstract

The effect of financial regulations on banks' lending behavior has been analyzed extensively in recent years, particularly in the case of developing countries. The concern arises mainly because government securities are considered as risk-free assets in financial regulation, prompting banks to hold them to keep a balanced portfolio. This research paper analyses the impact of financial regulations on Pakistani commercial banks' investment behavior in government securities, explicitly focusing on the effect of long-term liquidity requirements. The data has been analyzed using the Generalized Method of Moments method. The results suggest that Risk-Based Capital and long-term stable liquidity requirements incentivize banks to invest in government securities. However, the leverage ratio negatively affects bank investment in government securities. Additionally, the study highlights the importance of improving asset quality and increasing banks' market share to enhance their capacity for investment in government assets. The study also reveals that fiscal deficit amplifies the demand for funds, which increases bank investment in sovereign securities.