ON THE INFLUENCE OF PORTFOLIO AT RISK ON FINANCIAL STABILITY IN FINANCIAL INSTITUTIONS: THE MODERATING ROLE OF THE CENTRAL BANK A CASE STUDY OF COMMERCIAL BANKS, FINANCIAL ISTITUTIONS AND CLOSED BANKS CRISIS OF 2018

Abstract

ABSTRACT Portfolio at Risk (PAR) is a vital metric for assessing financial institution health, yet existing research often neglects its cumulative impact on financial stability and the effectiveness of central bank interventions in developing economies. This study addressed these gaps by investigating factors influencing PAR, its effects on financial stability, and the moderating role of central banks, guided by Modern Portfolio Theory (MPT), Agency Theory, and Financial Intermediation Theory. Using a cross-sectional mixed-methods approach, quantitative data were collected from 150 stakeholders in financial institutions, while qualitative insights were gathered from 12 key informants. The findings revealed that Loan Default Rates (B = 0.412, p = 0.000), Credit Risk Exposure (B = 0.305, p = 0.001), and Loan Loss Provisions (B = 0.325, p = 0.000) significantly increased PAR, while high Asset Quality (B = -0.220, p = 0.008) reduced it. Additionally, Economic Downturns (B = 0.187, p = 0.010) and Delinquency Rates (B = 0.307, p = 0.000) exacerbated PAR, impacting financial stability by lowering capital adequacy ratios, increasing non-performing loan ratios, and reducing returns on assets and equity. Respondents emphasized the importance of central bank interventions, such as regulatory adjustments and liquidity support, in mitigating these risks. For instance, monetary policy changes and supervisory measures were noted to strengthen risk management and stabilize institutions during economic downturns. The study concludes that effective PAR management is crucial for financial stability and recommends that financial institutions enhance risk assessment frameworks, adopt real-time loan monitoring, and maintain robust capital buffers. Central banks should enforce stricter regulatory measures and provide targeted liquidity support in times of economic distress. Future research should explore the long-term impact of such interventions across diverse financial systems