Examining the impact of liquidity creation on bank stability in the Asia Pacific region: Do ESG disclosures play a moderating role?

Juhi Gupta and Smita Kashiramka

Journal of International Financial Markets, Institutions and Money, 2024, vol. 91, issue C

Abstract: The global financial crisis reignited concerns regarding the stability and sustainability of banks. Since liquidity creation (LC) is a core output of banks, we examine if the nexus between LC and bank stability is conditional on ESG (environmental, social, and governance) disclosure by banks. Our sample comprises 178 commercial banks (1568 observations) during the period 2010–2019 in the Asia-Pacific region. Using a two-step system GMM estimation, our results document a positive impact of LC on bank stability. Additionally, ESG disclosures positively moderate the stability effect of LC, i.e., higher LC is associated with significantly more enhancement in bank stability for banks that have a higher disclosure of ESG scores compared to banks that have a moderate disclosure. Furthermore, we also provide evidence of variation in the moderating role of ESG disclosures in advanced and emerging economies. Overall, our results recommend that integrating ESG practices into banks' internal processes improves their financial soundness. Additionally, blanket implementation of liquidity regulations might be detrimental to banks’ stability.

Keywords: Bank stability; Liquidity creation; Sustainability reporting; ESG disclosure; Asia-Pacific (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G30 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:91:y:2024:i:c:s1042443124000210

DOI: 10.1016/j.intfin.2024.101955

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