The impact of green credit on bank asset quality: Empirical evidence from Vietnamese commercial banks

Abstract

This paper investigates the empirical relationship between green credit allocation and asset quality within the Vietnamese commercial banking sector under rigid post-COP26 national decarbonization regulations. Utilizing an original panel dataset tracking 25 commercial banks over the period 2016–2025 (comprising 250 bank-year observations), the study implements a robust two-step System GMM estimation framework to systematically eliminate unobserved institutional heterogeneity, measurement errors, and simultaneous reverse causality biases. The empirical results demonstrate that an increase in the green credit ratio substantially improves institutional asset safety, as it has a pronounced negative impact on non-performing loans (β = -4.125, p < 0.01). Concurrently, corporate financial buffers, specifically capital adequacy metrics (β = -1.854, p < 0.05) and bank asset scale (β = -0.124, p < 0.05), function as key risk-mitigating channels, while dynamic diagnostics fully confirm the statistical validity of the internal instruments. These findings provide a strategic risk-management toolkit for commercial banking executives to optimize loan-portfolio architectures during sustainable-financing expansions. Furthermore, the study offers vital structural insights for macroprudential authorities and central bank regulators to efficiently calibrate green banking mandates, develop centralized ESG credit databases, and establish national green financial taxonomies to insulate systemic asset quality from climate-transition shocks within emerging economies.