Fintech Competition, Bank Stability, and Risk-Taking: A Dynamic System-GMM Analysis (International Journal For Multidisciplinary Research)

Summary

• Bank risk exhibits high persistence, demonstrated by a lagged Z-score coefficient of 0.62 in the system-GMM estimation.p.4
• The empirical findings show a linear competition coefficient of -0.41 and a quadratic competition coefficient of 0.28, establishing a U-shaped relationship.p.4
• Capital ratio exhibits a positive coefficient of 0.33, confirming its positive contribution to financial stability.p.4
• Liquidity yields a positive coefficient of 0.19, supporting its stabilizing effect on bank balance sheets.p.4
• Bank size enters the specification with a positive coefficient of 0.15.p.4
• Model specifications are validated by an AR(2) test p-value of 0.31 and a Hansen test p-value of 0.24.p.4

Key insights

1. Moderate fintech competition reduces bank stability as incumbents chase yield, but intense competition enhances stability through market discipline.p.1
2. Bank risk is highly persistent over time, making static regression models inadequate for measuring stability.p.1
3. The non-monotonic relationship reconciles the competition-fragility and competition-stability perspectives into distinct competitive ranges.p.4
4. The turning point in the U-shaped stability curve occurs near the middle of the observed fintech competition range.p.3
5. Supervisory interventions are most critically required in the initial descending region where franchise erosion outpaces competitive discipline.p.4
6. Diagnostic tests confirm the absence of second-order serial correlation in residual dynamics.p.4