FinTech Adoption, Climate Risk Exposure, and Bank Stability: Unpacking the Mediating Role of Green Finance and the Moderating Role of Institutional Quality

Abstract

The increasing integration of financial digitalization with climate-related financial risks has created an important yet insufficiently integrated area of inquiry in banking research. Existing studies have largely examined either the implications of FinTech for financial stability or the adverse effects of physical and transition climate risks, with limited attention to how these dynamics interact. In particular, the mechanisms through which FinTech may contribute to bank resilience and the institutional conditions that influence this process remain inadequately understood. To address this gap, the present paper develops an integrated moderated-mediation framework in which green finance represented by environmentally oriented credit, bonds, and disclosure instruments serves as a mediating mechanism linking FinTech adoption and climate risk exposure to bank stability, measured using the Z-score. Institutional quality, assessed through the World Bank's Worldwide Governance Indicators, is proposed as a moderator of this indirect relationship. Drawing on financial intermediation theory, dynamic capabilities theory, and new institutional economics, the study develops five testable hypotheses and proposes a dynamic two-step System Generalized Method of Moments (GMM) approach, complemented by bootstrapped tests of indirect effects, for an unbalanced panel of commercial banks operating under diverse institutional conditions. An illustrative empirical demonstration, calibrated to reflect the direction and approximate magnitude of effects identified in closely related recent research, indicates that FinTech adoption and green finance may jointly support bank stability, whereas greater exposure to climate risk may weaken it. The results further suggest that stronger institutional quality may enhance the stabilizing function of green finance, particularly in weaker-governance environments. The paper contributes primarily to theory and methodology by conceptualizing green finance as a transmission mechanism through which FinTech may influence financial stability and by treating institutional quality as a boundary condition rather than merely a control variable. The study concludes by outlining implications for prudential regulators, central banks, and bank managers, while also identifying the data requirements and methodological limitations that should be considered before empirical estimation using primary panel data.

Keywords: FinTech; climate risk; bank stability; green finance; institutional quality; moderated mediation; System GMM.