Background and Context
Research Focus
This study examines how financial markets and institutions affect bank performance across 93 countries from 2008-2023.
ESG Integration
Environmental, Social and Governance readiness is analyzed as both a direct driver and moderator of banking outcomes.
Analytical Approach
Panel quantile regression captures nonlinear effects and handles non-normally distributed data with outliers across countries.
Financial Institutions Show U-Shaped Impact on Bank Performance
- The relationship between financial institution development and bank performance follows a U-shaped pattern over time.
- Initially, financial development reduces bank performance due to increased competition and market saturation pressures.
- Beyond a threshold, continued financial development improves bank soundness through innovation and efficiency gains.
Financial Institution Effects: Strong U-Shape with Significant ESG Moderation
- The negative FIP coefficient (-16.84) confirms initial adverse effects of financial institution development on banks.
- The positive FIP² coefficient (20.75) validates the U-shaped recovery as financial development continues further.
- ESG moderation effects (FIP×ESG: 28.89, FIP²×ESG: -33.66) flatten the curve and accelerate positive outcomes.
Entrepreneurship Boosts Bank Performance While Internet Usage Reduces It
- Entrepreneurship consistently increases bank performance (0.03) by diversifying loan portfolios and reducing risk concentration.
- Internet usage negatively affects bank soundness (-0.01) due to cybersecurity costs and unregulated fintech competition.
- Mobile usage shows small negative effects, though not statistically significant in the median quantile estimates.
ESG Readiness Transforms and Stabilizes the Financial Development-Performance Link
- High ESG readiness shifts the entire relationship upward, meaning banks perform better at all development levels.
- ESG flattens the U-curve, reducing the initial negative phase and accelerating the transition to positive outcomes.
- This moderating effect confirms ESG promotes stability and reduces vulnerability to financial system shocks.
Financial Institutions Model Explains More Variance Than Financial Markets Model
- Both models explain over 60% of variance in bank performance, indicating strong explanatory power for the framework.
- The Financial Institutions model slightly outperforms, suggesting institutional factors matter more than market factors.
- Robust M-estimation confirms results hold under alternative specifications, with R² reaching 67% for the FIP model.
Contribution and Implications
- First study to simultaneously examine financial markets and institutions' effects on bank performance within unified framework.
- Demonstrates ESG readiness can accelerate positive outcomes and reduce transition time from negative to positive effects.
- Provides evidence that policymakers should embed ESG compliance benchmarks as standard practice within banking regulation.
- Suggests central banks should integrate environmental targets with monetary policy through preferential green financing rates.
- Highlights need for enhanced cybersecurity infrastructure as internet banking expansion can negatively impact bank soundness.
Data Sources
- Finding 1 (U-shaped relationship): Conceptual visualization based on the theoretical model and significant coefficients from Table 4.
- Finding 2 (FIP coefficients): Bar chart constructed using regression coefficients from Table 4 FIP Model (FIP=-16.84, FIP²=20.75, FIP×ESG=28.89, FIP²×ESG=-33.66).
- Finding 3 (Control variables): Chart uses coefficient values from Table 4 for both models (ENT=0.03, INT=-0.01, MOB=-0.001/-0.002).
- Finding 4 (ESG moderation): SVG visualization based on Figures 6 and 7 in the article showing moderating effect patterns.
- Finding 5 (Model comparison): R² values from Table 4 (0.61, 0.62) and Table 6 (0.65, 0.67) for quantile and M-estimation approaches.
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