Abstract
Financial soundness is crucial for the health of the financial sector and economic stability. The study examines the degree of financial stability and its drivers in commercial banks using dynamic panel data analysis. Arellano & Bover and Blundell & Bond a two-step system GMM model were applied to test the hypothesis. The 'Z-score' was used as a proxy for financial stability. The results indicate that the previous year's financial stability, profitability, and liquidity positively influenced financial stability, while bank size, credit risk, and bank concentration have negative impacts. External factors including the GDP growth rate positively affected financial stability, whereas real interest rates have a negative impact on the financial stability of the banks. The findings of this study will have implications for banks, bank regulators, policymakers, and the government in fostering a stable banking environment through targeted policies and strategic management of financial metrics.