Linking Financial Soundness to Performance: An Empirical Assessment of CAMEL Indicators and Audit Quality

Abstract

Banking sector's stability and profit-making ability are two of the most important parameters for the resilience of the financial system, and this is generally also true for some of the emerging economies. In this research, the primary focus will be on the effect of financial soundness and market sensitivity on South-Asian banks' financial performance, apart from the connection with audit oversight as a moderator. A total of 82 banks from Pakistan, India, and Bangladesh variously from the years 2013-2022, were the entities for which the bank performance was monitored. Financial soundness, the audit oversight index was selected as the variable. Audit fees, committee structure, independence, meeting frequency, and mode of appointment of auditors were taken into consideration. Besides, Random Effect Regression Models and Fixed levels were the methodologies chosen to examine the influence along the way, with the involvement of interaction terms to investigate moderation effects. The two-separate impact analysis was done for the sake of the banks' best performance, capital adequacy, and management efficiency being the first choice as the most effective, while market risk sensitivity was the total opposite, contributing positively when the risk was controlled. The examination of the auditors turned out to be a very critical matter that requires much attention, with the support of a positive moderation in the case of performance, with both financially strong points and weaknesses. The investigation of the types of banks is associated with institutional differences-stronger effects appeasing the countries more formally governed by the audit. The study, therefore, is an initial evaluation of the interplay between financial stability and audit assurance in influencing banks' performance. Alignment of Governance with the bank's performance, lying at the core of performance improvement, could strengthen the argument and support of the Resource-Based View and agency theory, respectively. To have the banking system re-shaped for the good, the highest level of support to change should be traded in for the most demanding but still unrealistic yet sound means to the respective parties. As for the later research, a possible revision in the process of the study through dynamic modeling, partially isolating macroeconomic variations and developing new measures of governance, for instance, through expert assessment, would be an improvement.