Fintech Competition, Bank Stability, and Risk-Taking: A Dynamic System-GMM Analysis

Abstract

The competitive challenge posed by neobanks raises a question that reaches beyond profitability into the domain of financial stability: does intensified competition from digitally native entrants make incumbent banks safer or riskier? Banking theory offers opposing predictions, and the empirical answer is complicated by the persistence of bank risk over time and by the endogeneity of competition itself. This study addresses both complications through a dynamic panel model estimated by system generalized method of moments, applied to a secondary panel of banks observed over successive years. The lagged dependent variable captures the persistence of risk, while internal instruments derived from the panel's own structure address the endogeneity of competition. The estimates reveal a non-monotonic, U-shaped relationship between fintech competition intensity and bank stability: moderate competition is associated with declining stability as incumbents chase yield, but beyond a turning point further competition coincides with a recovery, consistent with a disciplining effect that prunes the weakest risk-takers. The Hansen test does not reject instrument validity and the absence of second-order serial correlation is confirmed, supporting the specification. The findings caution against linear readings of the competition-stability nexus and suggest that the stability consequences of neobank entry depend on where a market sits along this curve.