The study sought to determine the moderating effect of exchange rate on the relationship between firm characteristics and financial stability of commercial banks in Kenya. The study sought to establish the effect of exchange rate on financial stability of commercial banks in Kenya. The study further sought to determine the effect of firm characteristics as a composite index on financial stability of commercial banks in Kenya. Positivism research philosophy was employed. Causal research design

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... s utilized in this study. The study targeted 17 commercial banks from which secondary data was collected from the published financial reports for the study period between 2011 and 2018. Generalized method of moments (GMM) model guided by dynamic Panel regression analysis was utilized. Data analysis was run on the Stata 13 package and findings presented in tables while deriving conclusions and recommendations from the study findings. The study found out that exchange rate had a significant moderating effect on the relationship between firm characteristics and financial stability (β= 0.422519, p= 0.095) of commercial banks in Kenya. The study also found out that firm characteristics as a composite index had a significant negative effect on financial stability (β= -1.006024, p= 0.063) of commercial banks in Kenya. The coefficient of exchange rate at (β= 0.0177881, p=0.000) shows a statistically significant positive effect on financial stability of commercial banks. To deal with issues of exchange rate fluctuations, the study recommends that commercial banks in Kenya should adopt a unified exchange rate. The study further recommends that commercial banks should focus on streamlining their internal firm characteristics in order to ensure financial stability is achieved collectively since they are associated with variability in the exchange rate.