Green Finance, ESG Performance, and the Too‐Big‐to‐Fail Problem in ASEAN Banking Sectors: Two‐ and Three‐Way Interaction Approach

ABSTRACT Based on the moral hazard theory, this study analyzes the impact of green finance development and environmental, social, and governance (ESG) performance on the too‐big‐to‐fail (TBTF) problem by using a sample of 51 commercial banks in six ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) from 2017 to 2024 and employs a two‐ and three‐way interaction analysis approach. The study found that TBTF is a persistent issue among ASEAN banks. Additionally, it found that improvements in green finance development and ESG performance can help mitigate the TBTF problem. Finally, beyond these direct effects, the study also showed that green finance amplifies the negative impact of ESG performance on the TBTF problem. The findings were validated through multiple methods, including fixed‐effects and system GMM estimations. The results provide important policy implications for addressing the TBTF problem in the banking systems of ASEAN countries.