Green finance and FinTech can forge a path to financial stability post-pandemic

Background and Motivation

The global financial system has faced unprecedented stress tests in recent years, from the spillover effects of the COVID-19 pandemic to the growing urgency of climate change. In this context, two powerful forces have emerged: the disruptive rise of FinTech and the strategic push for green finance. However, the dynamic relationship between these forces and their combined impact on long-term financial stability remained unclear. This study was motivated by the need to understand whether the synergy of digital innovation and sustainable finance could create a more resilient financial ecosystem for both advanced and emerging economies.

Methodology and Scope

This research employed a robust, multi-faceted methodological approach. The analysis was based on balanced panel data from 148 countries (76 developed and 72 emerging) spanning from 2005 to 2022. The primary analysis was conducted using the dynamic two-step system Generalised Method of Moments (GMM) to establish causal relationships. To ensure the findings were robust and applicable across different economic conditions, the researchers also performed bootstrapped panel quantile regression. This comprehensive scope and rigorous methodology make the study one of the most extensive of its kind.

Key Findings and Contributions

• FinTech as a Stability Driver: FinTech has a significant positive effect on financial stability across the entire global sample.
• The Dual Role of Green Finance: The overall composite of green finance boosts financial stability by improving financial soundness. However, its dimensions have varying impacts:

Positive Dimensions: The environmental, resource, and financial dimensions of green finance positively influence financial stability.

A Challenging Dimension: The economic dimension of green finance was found to have a short-term negative impact, suggesting initial costs or transitional frictions.

• Powerful Synergy: The moderating role of green finance is pivotal. All interaction terms between FinTech and the dimensions of green finance (environmental, economic, and financial) contribute positively and significantly to financial stability.
• A Note of Caution on Resources: The interaction between the resource dimension of green finance and FinTech negatively impacts stability, indicating that countries must learn to utilise natural and financial resources more efficiently to avoid strain.
• Pandemic Impact: The COVID-19 spillover effect consistently undermined financial stability across all countries.
• Divergence Between Economies:

In advanced countries, both FinTech and green finance robustly support financial stability.

In emerging countries, green finance (except for the resource dimension) and its interaction with FinTech (except for the environmental dimension) enhance stability. The negative environmental interaction hints at the environmental hazards from their carbon-intensive industrial policies.

Why It Matters

In an era of economic uncertainty and climate urgency, this research demonstrates that digital finance and sustainable investing are not just niche trends but are central to the health of the global financial system. It proves that strategically aligning technological innovation with green policy is not merely an environmental imperative but a financial one. The findings move the conversation beyond theory, providing empirical evidence that an integrated approach can mitigate risks and foster confidence among investors and the public.

Practical Applications

• Integrated Policy Frameworks: Governments should develop unified policy frameworks that promote the adoption of FinTech solutions within green finance initiatives, creating a "sustainable transition finance" policy.
• Prioritise Synergistic Dimensions: Policymakers should focus on green finance dimensions that show the strongest positive synergy with FinTech, particularly environmental and financial projects.
• Resource Efficiency for Emerging Economies: Emerging nations must be supported with technology and knowledge to use resources more efficiently, turning a current point of strain into an opportunity for improvement.
• Build Resilient Ecosystems: By leveraging these findings, leaders can establish financial ecosystems that are not only stable and profitable but also drive sustainable economic development and reduce the risk of future financial crises.

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text!