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discipline. In the banking sector, where trust is critical, these features can enhance
resilience during periods of uncertainty. This interpretation is consistent with prior studies
showing that higher-ESG firms tend to preserve trust and reduce fragility under stress
(Lins et al., 2017; Neitzert & Petras, 2021; Chiaramonte et al., 2022).
The results also underscore the importance of the institutional environment. The
positive coefficient on CORRUPTION, where higher CPI values indicate lower corruption,
suggests that stronger corruption control is associated with greater bank stability (H2).
This finding is supported by robustness checks using Rule of Law as an alternative proxy.
Overall, bank resilience depends not only on firm-level governance, but also on the
quality of legal enforcement and the broader institutional setting.
These findings are particularly relevant in the context of digital transformation.
While digitalization improves efficiency and service delivery, it also increases complexity
and regulatory challenges (Vives, 2019; Arner et al., 2017). In such an environment,
governance becomes more important. Strong ESG performance can support internal
discipline and transparency, while better institutional quality enhances oversight and
reduces governance distortions.
The negative coefficient on EFFR (H3) further reinforces this argument. Higher cost
inefficiency is associated with lower bank stability, indicating that the benefits of digital
transformation are unlikely to materialize without effective cost control and managerial
discipline. Digital innovation therefore supports stability only when combined with strong
governance and operational efficiency.
In conclusion, financial stability in the digital era depends not only on technological
advancement, but also on the interaction between ESG governance, institutional quality,
and cost efficiency. Digital transformation is more likely to strengthen resilience when
supported by robust governance frameworks and credible institutions (Arner et al., 2017;
Vives, 2019; Abid et al., 2021; Li et al., 2022). For regulators and bank managers in Asia,
this implies that the benefits of digital innovation are more sustainable when
accompanied by strong governance and disciplined management.
5. Conclusion and recommendations
This study contributes to the literature by showing that ESG performance is
positively associated with bank stability and functions as a substantive governance
mechanism rather than merely a reputational signal. The findings also highlight that ESG
does not operate in isolation. Institutional quality and cost efficiency are closely linked to
bank stability, with stronger corruption control consistently associated with more resilient
banking systems.
Taken together, these findings suggest that bank stability reflects the interaction
between firm-level governance and country-level institutional conditions. While ESG can
enhance internal governance and stakeholder confidence, its stabilizing effect is more
pronounced in environments with credible legal enforcement and regulatory oversight.
This relationship becomes increasingly important in complex and technology-intensive
financial systems.
Several policy implications follow. Regulators should integrate ESG into prudential
and supervisory frameworks rather than treating it as a purely voluntary or disclosure-
based practice. At the same time, improving institutional quality, particularly
transparency, enforcement, and accountability, is essential to ensure the effectiveness of
governance mechanisms.

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