ESG performance and bank financial stability in Asia: The moderating role of market power

Type of the article: Research ArticleAbstractBank-based intermediation dominates most Asian financial systems, so individual bank resilience translates directly into the resilience of the wider financial system. This study examines whether environmental, social, and governance (ESG) performance improves bank financial stability and whether bank market power moderates this relationship. Using an unbalanced panel of 264 listed banks in 22 Asian economies from 2010 to 2024 (2,071 bank-year observations), the study estimates a dynamic ZSCORE model with a two-step system generalized method of moments, with market power measured by the Lerner index derived from a translog cost function. The association between ESG performance and stability is conditional on market power rather than generally positive: the interaction ESG x LERNER is negative and significant (b = –14.14225, p < 0.05); the marginal effect of ESG declines across the observed range of the Lerner index, from positive and significant at low market power levels to statistically indistinguishable from zero around the sample mean of 0.311. At the pillar level, social performance provides the clearest evidence (b = 2.81681, p < 0.01; interaction b = –8.01984, p < 0.01), governance and its interaction are significant at the 10 percent level, while the environmental pillar is positive at the 10 percent level; its interaction with market power is not statistically significant. Robustness checks excluding the COVID-19 period and Chinese banks, and specifications with year fixed effects, preserve the negative moderation for aggregate ESG and the social pillar. Market power therefore is a boundary condition on the extent to which ESG performance translates into bank financial stability.