Rendy Pradana Hamidjaya, Dwi Nastiti Danarsari
This study examines the relationship between banks’ liquidity creation and banking stability using a two-step System GMM approach on a global bank panel (2014–2023), distinguishing between Advanced Economies (AEs) and Emerging Market and Developing Economies (EMDEs). The aggregate results confirm that higher liquidity creation significantly weakens banking stability. Significantly, Environmental, Social, and Governance (ESG) performance acts as a robust positive moderator, mitigating this fragility by enhancing financial resilience. However, mandatory ESG regulations are found to negate this stabilizing benefit, introducing compliance costs and complexities that erode the resilience derived from high ESG performance. Further analysis shows that while AEs replicate the negative liquidity creation-stability baseline, EMDEs exhibit a positive relationship, reflecting the role of banks in financial deepening. Crucially, the destabilizing effect of mandatory regulation is amplified in EMDEs. These findings underscore that the impact of ESG initiatives and regulatory frameworks is heavily contingent upon institutional context. The study provides critical insights for policymakers aiming for targeted, context-specific ESG initiatives to strengthen financial system resilience.