Does the bank’s FinTech innovation reduce its risk-taking? Evidence from China’s banking industry

Abstract

In the context of developing FinTech innovation, a commercial bank’s use of FinTech innovation can improve its risk management capability, thereby reducing its risk-taking. This paper explores the impact and mechanism of a bank’s FinTech innovation on its risk-taking using panel data of 65 commercial banks between 2008 and 2020. We innovatively construct a bank-level index based on web crawler technology and obtain the annual numbers of news items about a bank’s FinTech innovation from each bank in Baidu News. The empirical results show that improvement in the bank’s FinTech innovation significantly reduces its risk-taking. To overcome endogenous problems, including measurement errors and omitted variables, we use the instrumental variables (IV) and difference-in-differences (DID) methods to test the hypothesis and obtain consistent estimated results. The mechanism analysis shows that banks rely on FinTech innovation to reduce their risk-taking by improving their operating income and capital adequacy ratio, optimizing their operating performance, and improving their risk control capabilities. Further, a heterogeneity analysis shows that the effect of a bank’s FinTech innovation in reducing its risk-taking is more pronounced in larger, state-owned, joint-stock, and highly-competitive commercial banks. Our research results still hold after a series of robustness tests, including changing the construction methods of the bank’s FinTech innovation index, replacing the bank’s risk-taking indicators, tail-shrinking treatment, and changing samples. Our findings provide micro evidence for the application of FinTech innovation in commercial banks to reduce their risk-taking.