Does FinTech Increase Bank Risk Taking?

Selim Elekdag, Drilona Emrullahu and Sami Ben Naceur

No 2024/017, IMF Working Papers from International Monetary Fund

Abstract: Motivated by its rapid growth, this paper investigates how FinTech activities influence risk taking by financial intermediaries (FIs). In this context, this paper revisits an ongoing debate on the impact of competition on financial stability: on one side, it is argued that greater competition encourages greater risk taking (competition-fragility hypothesis), while the other side of the debate asserts that more competition can increase financial stability (competition-stability hypothesis). Using a curated databased covering over 10,000 FIs and global FinTech activities, we find a robust relationship whereby greater FinTech presence is associated with heightened risk taking by FIs, offering support for the competition-fragility hypothesis. However, the inclusion of bank-, industry-, and country-specific characteristics can alter this relationship. Importantly, there is suggestive evidence indicating that in certain cases, greater FinTech presence may be associated with less FI risk taking amid stronger domestic institutions. Notwithstanding the relevance for policy, this paper presents a novel framework that may help reconcile some of the conflicting results in the literature which have found supportive evidence for each of the two competing hypotheses.

Keywords: fintech; bank risk taking; competition; competition-fragility hypothesis; FinTech activity; FI risk; competition-stability hypothesis; market power; Commercial banks; Cooperative banks; Financial statements; Global (search for similar items in EconPapers)
Pages: 46
Date: 2024-01-26
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-fmk, nep-pay and nep-rmg
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Journal Article: Does FinTech Increase Bank Risk-taking? (2025)
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