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| FinTech and Banking Behavior: A Liquidity Creation Perspective |
| SONG Ke, LI Zhen, YANG Jiawen
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School of Finance, Renmin University of China;
Yanqi Lake Beijing Institute of Mathematical Sciences and Applications;
School of Business, The George Washington University |
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Abstract With the development of digital technologies such as big data, cloud computing, blockchain and artificial intelligence and their widespread application in the financial field, FinTech has become an important force in promoting financial development and serving the real economy. The literature shows that FinTech is playing an increasingly important role in alleviating information asymmetry, reducing financial service costs, improving operating efficiency and enhancing financial accessibility. FinTech has also profoundly affected traditional financial products and services, especially the activities of traditional financial institutions. Thus, to better serve the real economy, promote high-quality economic development and further enhance the construction of the modern financial system, we need to have a better understanding of the development of FinTech and its relationship with traditional banks.
According to contemporary intermediation theory, banks fulfill two important economic functions: risk transformation and liquidity creation. However, although some studies discuss the impact of FinTech on bank risk-taking, little research examines the factors that affect the creation of bank liquidity. By realizing the function of liquidity creation, banks can effectively improve their capital allocation and promote the growth of the real economy. However, little theoretical and empirical research examines how FinTech affects bank liquidity creation. This paper theoretically and empirically explores the relationship between FinTech and traditional finance with the aim of promoting the integrated development of financial innovation and the high-quality development of the financial sector.
Based on data from 145 commercial banks in China from 2011 to 2020, this paper examines the impact of FinTech development on bank liquidity creation and its mechanism. The results show that (1) the external competition effect brought by the development of FinTech is greater than the technology spillover effect, which inhibits bank liquidity creation. This is mainly reflected in the negative impact on asset-side liquidity creation and off-balance sheet liquidity creation. However, FinTech has no significant impact on liability-side liquidity creation. The increase in the breadth of coverage and depth of use of FinTech reduces bank liquidity creation, while the increased digitalization of FinTech promotes bank liquidity creation. (2) FinTech reduces bank liquidity creation by decreasing the cost efficiency and profit efficiency of banks and inhibiting the overall default risk-taking, asset risk-taking and capital shortage risk-taking of banks. (3) With the development of FinTech, large banks and highly digitized banks create more liquidity, although banks in highly market-oriented regions create less liquidity.
This paper makes four main contributions to the literature. First, by investigating the impact of FinTech development on bank liquidity creation and its mechanism, we not only enrich research on the effects of FinTech on traditional bank behavior but also provide a useful supplement to research on the factors that affect bank liquidity creation. Second, following the method proposed by Berger and Bouwman (2009) and combined with the actual activities of Chinese commercial banks, we construct a bank liquidity creation index to reflect the bank liquidity mismatch. By examining the impact of FinTech on bank liquidity creation, we not only analyze the overall relationship between FinTech and bank liquidity creation but also further analyze the impact of FinTech on the components and sub-dimensions of bank liquidity creation. Third, this paper investigates how FinTech development affects bank liquidity creation through channels such as bank operating efficiency and risk-taking. Fourth, we analyze the asymmetric impacts of FinTech on liquidity creation among different bank entities. We classify the banks in our sample into large banks, highly digitized banks and banks in highly market-oriented regions, and examine the heterogeneous impacts of FinTech on bank liquidity creation.
The main conclusions of this paper have a number of important policy implications. First, the government should encourage banks to engage in digital transformation and technology empowerment, because in addition to improving their operating efficiency and risk-taking, this will increase their liquidity creation and improve their ability to serve the real economy. Second, the government should encourage banks to introduce online loans and increase their loan books under the premise of controlling risk, and thus promote bank asset-side liquidity creation. The government should also support banks in developing innovative off-balance activities and expanding their credit commitments, and thus increase the off-balance sheet liquidity creation of banks. Third, the government should support small and medium-sized banks, less digitized banks and banks in highly market-oriented regions to carry out digital transformation, enhance their ability to deal with the external shocks brought by FinTech and thus promote the creation of bank liquidity.
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Received: 08 June 2020
Published: 07 April 2023
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