Does digital transformation affect systemic risk? Evidence from the banking sector in China

Yawen Li, Yufei Xia, Zongting Sun and Naili Sun

International Review of Financial Analysis, 2025, vol. 102, issue C

Abstract: Digital transformation (DT) has reshaped the banking industry's competition patterns and operational approaches and introduced new challenges and risks to banks. This study examines the effect of DT on systemic risk. Using panel data from 2011Q1 to 2021Q4, we empirically confirm that commercial banks' DT promotion can significantly mitigate systemic risk. A 1 % increase in the standard deviation of DT can result in a maximum 8.54 % decrease in the mean banks' systemic risk. Furthermore, DT reduces banks' systemic risk by increasing bank concentration, enhancing business diversification, optimizing cost control, and reducing charter value. We further determine the negative moderating effect of economic policy uncertainty on the DT–systemic risk nexus. The impacts of DT on commercial banks' systemic risk exhibit some heterogeneity based on different DT dimensions, systemically (un)important banks, and bank size. Our main conclusions remain robust after addressing potential endogeneity and employing alternative dependent variables, sample periods, and clustered standard errors. We also analyze the effects of DT on banks' future practices by reducing systemic risk. As DT advances, mitigating systemic risk in banks results in lower earnings and higher risk-taking in the next period. Finally, we propose some implications for banks and regulators.

Keywords: Digital transformation; Commercial bank; Systemic risk; Bank behavior (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:102:y:2025:i:c:s1057521925002248

DOI: 10.1016/j.irfa.2025.104137

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