The Impact of FinTech Credit on Financial Stability: An Empirical Study.

Abstract

The advent of FinTech credit, a new technological-financial innovation engaged in bank- like activities, has created new dimensions in nonbank credit intermediation, with potential implications for financial stability. However, existing literature and policy debates provide mixed views about the impact of FinTech credit on financial stability. Moreover, the expansion of nonbank credit confronts the role of macroprudential policy in safeguarding financial stability beyond banking. This study aims to investigate whether FinTech credit disrupts or enhances overall financial stability and whether it impacts bank risk-taking. Additionally, the study explores the impact of macroprudential policies on the growth of FinTech credit. This study utilises cross-country unbalanced panel data from 25 economies over the period 2005Q1 to 2019Q4. A weighted sum approach is employed to construct the aggregate financial stability index used to measure financial stability. To measure bank risk-taking, five bank risk-taking measures, namely: credit, liquidity, portfolio, leverage, and insolvency risks, are used. Furthermore, the integrated macroprudential policy (iMaPP) dataset developed by Alam et al. (2019) is used to construct macroprudential policy variables. Several econometric models are employed for baseline estimations and robustness analysis. The main findings reveal significant evidence of a non-linear (inverted U-shaped) relationship between FinTech credit and overall financial stability and bank risk-taking. These findings suggest that FinTech credit may enhance overall financial stability to a certain threshold, after which a further increase in FinTech credit may disrupt financial stability. Similarly, the expansion of FinTech credit may initially increase bank risk- taking but later lessen it. The results also show that macroprudential policies promote the growth of FinTech credit, which may undermine its effectiveness and contribute to financial stability risks. The results remain stable based on the extensive and robust analysis performed. The study provides important policy implications and contributes to existing and emerging theories such as nonbank credit intermediation and financial innovations.