The Evolution of Risk Management in Banking: Assessing the Impact of FinTech Innovations on Traditional Models

This diploma investigates the relationship between the adoption of Financial Technology (FinTech) innovations and the volatility of financial performance in traditional banks. As banks increasingly integrate FinTech solutions into their operations, it is crucial to understand how these technologies influence the effectiveness and stability of risk management practices. A diverse dataset of 150 banks from 50 countries across North America, Europe and Asia, covering the period from 2020 to 2022 was employed. The sample includes commercial banks, investment banks and savings banks of various sizes, providing a comprehensive representation of the banking sector. The main independent variable of interest is the FinTech Adoption Index (FAI), a composite measure of the extent to which banks have integrated FinTech solutions into their operations. FAI is constructed based on publicly available information on banks' implementation of specific technologies, such as big data analytics, artificial intelligence and cloud computing. The index ranges from 0 to 100, with higher values indicating greater FinTech adoption. Using panel data regression techniques, the impact of FAI on the volatility of banks' return on assets (ROA) and return on equity (ROE) was examined, controlling for bank-specific characteristics such as size, leverage and liquidity, as well as geographic factors. The findings suggest that higher levels of FinTech adoption are significantly associated with lower volatility in both ROA and ROE. These results are robust to estimation methods and potential endogeneity concerns, highlighting the stabilizing effects of FinTech adoption on banks' financial performance and risk management practices. The implications of this research are relevant for bank managers, regulators and policymakers. For banks, investing in FinTech innovations can enhance risk management capabilities and promote more stable financial performance, while regulators and policymakers should foster an enabling environment for responsible FinTech adoption. The findings contribute to the growing literature on the impact of FinTech on the banking sector and provide valuable insights for navigating the complex era of digital transformation and risk management in the financial industry.