Does FinTech Increase Bank Risk Taking?

IMF Working Papers, January 26, 2024

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Using a curated database covering over 10,000 FIs and global FinTech activities, the paper finds a robust relationship whereby greater FinTech presence is associated with heightened risk taking by financial intermediaries (FIs), offering support for the competition-fragility hypothesis.
Inclusion of bank-, industry-, and country-specific characteristics can alter this relationship.
Suggestive evidence indicates that in certain cases, greater FinTech presence may be associated with less FI risk taking amid stronger domestic institutions.
The paper presents a novel framework that may help reconcile conflicting results in the literature supporting both the competition-fragility and competition-stability hypotheses.

Revisits the debate on the impact of competition on financial stability:
- Competition-fragility hypothesis: greater competition encourages greater risk taking.
- Competition-stability hypothesis: more competition can increase financial stability.
Focus: how FinTech activities influence risk taking by financial intermediaries.

Curated database covering over 10,000 FIs and global FinTech activities.
Global scope, examining interactions between FinTech presence and FI risk taking across bank-, industry-, and country-level factors.

Evidence supports policy discussion on how FinTech expansion affects financial stability through its competitive effects on traditional financial intermediaries.
The finding that stronger domestic institutions can mitigate increased FI risk taking suggests targeted institutional-strengthening measures could shape the stability implications of FinTech growth.
The novel framework offered in the paper can inform policymakers and researchers aiming to reconcile divergent empirical results on competition and stability.