Monetary Policy, Prudential Regulations, and Domestic Credit: The Role of Commercial Banks in Pakistan

The objective of this study is to test the impacts of significant devices of monetary policy and prudential regulations on banks' ability to invest and lend. The interconnectedness of the banking sector, public sector debt, and financing for private sector business activities in Pakistan is also an important concern of this study. It was presumed that the effects of prudential regulations are transformed through mandatory magnitudes of equity and cash requirements. The significant positive and robust impact of equity on investment, advances, deposits, and liquidity has been ascertained. It was concluded that prudential regulations do not discourage the lending or investment. This study is based on 5 years of data of 33 commercial banks in Pakistan and the random effect models (REM) and the seemingly-unrelated regression estimation (SURE) techniques have been adopted to estimate the parameters.