The Impact Of Green Finance And Fintech Mechanisms On Financial Stability In Advanced And Emerging Nations

Abstract

This paper examines how green finance and financial technology (FinTech) mechanisms affect financial stability across advanced and emerging economies. We develop a comprehensive theoretical framework that links environmental finance initiatives and FinTech innovations to traditional financial system stability channels — credit risk, market risk, liquidity risk, and systemic risk. Using a panel dataset covering 40 countries (20 advanced and 20 emerging) over the period 2010–2024, we propose a set of empirical strategies to identify the direct and interaction effects of green finance adoption and FinTech penetration on macro prudential indicators and bank-level stability measures. Our baseline specification uses dynamic panel methods (system-GMM) and panel fixed effects with clustered standard errors. We supplement the baseline with event-study analyses around major regulatory or policy milestones (green bond issuance frameworks, FinTech sandbox launches), bank-level microdata regressions, and instrumental variable approaches to address endogeneity. We find evidence consistent with the hypothesis that mature green finance frameworks, when coupled with robust FinTech ecosystems, enhance financial stability by diversifying funding sources, improving risk pricing, and strengthening risk management — though benefits vary by country income level and institutional strength. The paper concludes with policy recommendations for harmonizing green finance incentives and FinTech regulation to promote resilient financial systems. This study examines the multifaceted influence of green finance and Financial Technology (FinTech) on the financial stability of both advanced and emerging economies, utilizing a comprehensive panel dataset from 2005 to 2022 covering 148 countries. We develop composite indices for financial stability, FinTech, and green finance to provide a robust empirical analysis, employing a two-step system Generalized Method of Moments (GMM) and bootstrapped panel quantile regression to address potential endogeneity and sample heterogeneity. Our findings indicate that FinTech and green finance positively affect financial stability in advanced nations. However, in emerging economies, while the overall interaction of FinTech and green finance (excluding the resource dimension) enhances financial stability, the environmental dimension of green finance may present risks due to industrial carbon policies. The study also confirms a negative impact of the COVID-19 pandemic on financial stability across all regions. These results provide novel insights into the context-specific dynamics of sustainable financial development and offer valuable policy recommendations for fostering resilient and low-carbon financial systems.