A master project by four alumni of the Finance Program Class of 2018 is soon to be added to the working paper series of the Asian Development Bank Institute (ADBI).
Abstract
Fintech has increasingly become part of the global economy with the evolution of technology, increasing investments in fintech firms, and greater integration between traditional incumbent financial firms and fintech. Since the 2007–2009 financial crisis, research has also paid more attention to systemic risk and the impact of financial institutions on systemic risk. As fintech grows, so too should the concern about its possible impact on systemic risk. This paper analyzes two indices of public fintech firms (one for the United States and another for Europe) by computing the ∆CoVaR of the fintech firms against the financial system to measure their impact on systemic risk. Our results show that at this time fintech firms do not contribute greatly to systemic risk.
Conclusions and key results
Our results show that, for the US, the payment and remittances and the market and trading support categories contribute the most to the VaR of the fintech industry. Instead, in Europe, fintech firms that provide software solutions and information technologies seem to be contributing the most to the risk of the sector. The estimation that includes fintech firms and the representative sample of the financial sectors show that fintech firms are not systemically important. Within the US financial system, the fintech companies that do contribute to systemic risk increase it by around 0.03%, while, in Europe, fintech firms contribute very little to the systemic impact (close to 0%). The Spearman’s rank correlation between a fintech firm’s ∆CoVaR and its respective size and between a fintech firm’s ∆CoVaR and its beta strengthens the importance of our estimations for a better assessment of systemic risk rather than just relying on the size and the beta of the firms to determine their likely contribution to systemic risk.
Some limitations of our study include the scope of our analysis method (∆CoVaR), the representation of the fintech sector, and the analysis of only two markets. However, micro-level data analysis focusing on each individual fintech category and changing the focus on emerging markets could reveal the specific risks, highlighting key research lines.
About the authors
- Lavinia Franco is a research student at Cass Business School, City University of London.
- Ana Laura García is the Head of the Financial Research Department at Bank of Mexico.
- Vigor Husetović is a Deals Associate at PwC Croatia.
- Jes Lassiter is a financial advisor in Fayetteville, AR (USA).
All of the authors are alumni of the Barcelona GSE Master’s in Finance, Class of 2018.