The moderating role of green banking in managing financial risks and sustainable bank performance in an emerging economy

This research investigates how green banking (GBNK) moderates the relationship between financial risks and sustainable bank performance of private commercial banks (PCBs) in Bangladesh from 2014 to 2023. Using balanced panel data from 21 listed private commercial banks over 2014 to 2023 (210 bank-year observations), the analysis estimates pooled OLS, fixed effects, and random effects specifications, with Hausman tests guiding model choice and Driscoll-Kraay robust standard errors to address common panel-data concerns. Bank performance is measured by Tobin’s Q, capturing market-based expectations of banks’ current and future prospects. The results indicate a positive association between interest rate risk, proxied by net interest margin, and bank performance proxied by Tobin’s Q, while solvency risk shows a significant negative relationship with bank performance. Furthermore, the moderating effect of green banking on liquidity risk has a positive effect, and solvency risk has a negative impact on banks’ performance. The results highlight that IT-based financial innovation and sustainable lending practices contribute to long-term resilience only when embedded within green strategic frameworks. The bank size impacts negatively, and profitability impacts positively on banks’ performance. This study also offers new empirical evidence from an emerging economy context, demonstrating green banking plays a crucial role in mitigating risk exposure and promoting sustainable performance. However, bank managers should considerable investments in eco-friendly projects and align their risk mitigation strategy to enhance bank performance. The study provides significant evidence beneficial for academics, fund managers, and environmentally conscious investors.