Fintech, bank diversification and liquidity: Evidence from China

This research investigates the influence of Fintech development on bank diversification and liquidity in China. Analysing 101 banks between 2011 and 2021, we apply robust text mining processes and implement factor analyses to construct a Fintech development index, which is used to test for specific liquidity and diversification influence across the Chinese banking industry. Our results provide robust empirical evidence that the development of Fintech reduces bank liquidity creation and helps to increase bank diversification. We find further evidence that this relationship is heterogeneous. Both state-owned and smaller banks, as measured by market capitalisation, are found to have presented a weaker response to Fintech development. Moreover, the outbreak of the COVID-19 pandemic is found to have enhanced the inhibitory effect of Fintech on bank liquidity creation, and thereby weakening its contribution to bank diversification.