The purpose of this paper is threefold. First, it measures
profit efficiency and financial stability of commercial banks of
Pakistan. Second, it empirically estimates the effect of the already
implemented financial regulations on the profit efficiency and financial
stability of banks. Third, it examines the differential effect of
financial regulations on profitability and financial soundness across
bank size. To carry out the empirical analysis, a balanced bank-level
panel data covering the period 2008-2014 is used. To gauge the profit
efficiency of commercial banks, Data Envelopment Analysis (DEA) is
utilised, while, to proxy the financial soundness, the Z-score is
calculated for each bank. The panel regression approach is used to
examine the effects of financial regulations on the profit efficiency
and financial soundness of banks. We find that the financial regulations
enforced by State Bank of Pakistan (SBP) have significant impacts on the
profit efficiency and financial stability of banks. The results indicate
that the non-performance loans to assets ratio (NPLL) and the reserve
ratio (RR) impact positively, whereas, the liquidity ratio (LIQR) and
the loans to deposits ratio (LODEPOSIT), significantly and negatively
affect the profit efficiency of banks. However, only LR and RR are
positively and significant related to the financial stability. The
results also suggest that the financial regulations have significant
differential effects on the profit efficiency and financial soundness of
banks across bank size. JEL Classification: C23, E44, G21, G28 Keywords:
Profit Efficiency, Financial Soundness, Financial Regulations, Data
Envelopment Analysis, Z-Score, Differential Effects