IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v95y2024ipbs1057521924004125.html
   My bibliography  Save this article

How technological innovation influence operational risk: Evidence from banks in China

Author

Listed:
  • Hu, Mingya
  • Zhang, Yongjie
  • Feng, Xu
  • Xiong, Xiong

Abstract

We use data on banks' patent applications and legal or regulatory violations by commercial banks to demonstrate that technological innovation increases operational risk in banks. This increase in risk is due to the introduction of complex technology, which may elevate the likelihood of technical malfunctions, especially when there is a misalignment between staff proficiency and the demands of these advanced systems. Furthermore, the impact of technological innovation on operational risk is predominantly observed in non-state-owned banks, banks with employees of lower educational levels, and banks with high levels of digitalization. Additionally, this effect is pronounced in banks lacking a history of technological failures and those operating within highly competitive environments. Overall, our findings underscore the effect of technological innovation on the operational management of commercial banks.

Suggested Citation

  • Hu, Mingya & Zhang, Yongjie & Feng, Xu & Xiong, Xiong, 2024. "How technological innovation influence operational risk: Evidence from banks in China," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924004125
    DOI: 10.1016/j.irfa.2024.103480
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521924004125
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2024.103480?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Francesco Campanella & Maria Rosaria Peruta & Manlio Giudice, 2017. "The Effects of Technological Innovation on the Banking Sector," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(1), pages 356-368, March.
    2. Taylor A Begley & Kandarp Srinivasan, 2022. "Small Bank Lending in the Era of Fintech and Shadow Banks: A Sideshow?," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 4948-4984.
    3. Christine A Parlour & Uday Rajan & Haoxiang Zhu, 2022. "When FinTech Competes for Payment Flows," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 4985-5024.
    4. Bryce, Cormac & Webb, Rob & Cheevers, Carly & Ring, P. & Clark, G., 2016. "Should the insurance industry be banking on risk escalation for solvency II?," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 131-139.
    5. Kühn, Reimer & Neu, Peter, 2003. "Functional correlation approach to operational risk in banking organizations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 322(C), pages 650-666.
    6. Thakor, Anjan, 2020. "Corrigendum to: Fintech and Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    7. Gillet, Roland & Hübner, Georges & Plunus, Séverine, 2010. "Operational risk and reputation in the financial industry," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 224-235, January.
    8. Buchak, Greg & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2018. "Fintech, regulatory arbitrage, and the rise of shadow banks," Journal of Financial Economics, Elsevier, vol. 130(3), pages 453-483.
    9. Li, Jianping & Li, Jingyu & Zhu, Xiaoqian & Yao, Yinhong & Casu, Barbara, 2020. "Risk spillovers between FinTech and traditional financial institutions: Evidence from the U.S," International Review of Financial Analysis, Elsevier, vol. 71(C).
    10. Azamat Abdymomunov & Filippo Curti, 2020. "Quantifying and Stress Testing Operational Risk with Peer Banks’ Data," Journal of Financial Services Research, Springer;Western Finance Association, vol. 57(3), pages 287-313, June.
    11. Nagaoka, Sadao & Kwon, Hyeog Ug, 2006. "The incidence of cross-licensing: A theory and new evidence on the firm and contract level determinants," Research Policy, Elsevier, vol. 35(9), pages 1347-1361, November.
    12. Cheng, Maoyong & Qu, Yang, 2020. "Does bank FinTech reduce credit risk? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    13. Yuqian Xu & Tom Fangyun Tan & Serguei Netessine, 2022. "The Impact of Workload on Operational Risk: Evidence from a Commercial Bank," Management Science, INFORMS, vol. 68(4), pages 2668-2693, April.
    14. Wang, Tawei & Hsu, Carol, 2013. "Board composition and operational risk events of financial institutions," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2042-2051.
    15. Yuqian Xu & Michael Pinedo & Mei Xue, 2017. "Operational Risk in Financial Services: A Review and New Research Opportunities," Production and Operations Management, Production and Operations Management Society, vol. 26(3), pages 426-445, March.
    16. Julien Hambuckers & Andreas Groll & Thomas Kneib, 2018. "Understanding the economic determinants of the severity of operational losses: A regularized generalized Pareto regression approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(6), pages 898-935, September.
    17. W. Scott Frame & Larry D. Wall & Lawrence J. White, 2018. "Technological Change and Financial Innovation in Banking: Some Implications for Fintech," FRB Atlanta Working Paper 2018-11, Federal Reserve Bank of Atlanta.
    18. Chernobai, Anna & Jorion, Philippe & Yu, Fan, 2011. "The Determinants of Operational Risk in U.S. Financial Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1683-1725, December.
    19. Imad A. Moosa, 2007. "Operational Risk: A Survey," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 16(4), pages 167-200, November.
    20. Cummins, J. David & Embrechts, Paul, 2006. "Introduction: Special section on operational risk," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2599-2604, October.
    21. repec:cup:jfinqa:v:46:y:2011:i:06:p:1683-1725_00 is not listed on IDEAS
    22. John Hagedoorn & Geert Duysters, 2002. "External Sources of Innovative Capabilities: The Preferences for Strategic Alliances or Mergers and Acquisitions," Journal of Management Studies, Wiley Blackwell, vol. 39(2), pages 167-188, March.
    23. Lee, Chi-Chuan & Li, Xinrui & Yu, Chin-Hsien & Zhao, Jinsong, 2021. "Does fintech innovation improve bank efficiency? Evidence from China’s banking industry," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 468-483.
    24. Barakat, Ahmed & Chernobai, Anna & Wahrenburg, Mark, 2014. "Information asymmetry around operational risk announcements," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 152-179.
    25. Ye Guo & Chen Liang, 2016. "Blockchain application and outlook in the banking industry," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-12, December.
    26. Fang, Yi & Wang, Qi & Wang, Fan & Zhao, Yang, 2023. "Bank fintech, liquidity creation, and risk-taking: Evidence from China," Economic Modelling, Elsevier, vol. 127(C).
    27. Chong, Terence Tai-Leung & Lu, Liping & Ongena, Steven, 2013. "Does banking competition alleviate or worsen credit constraints faced by small- and medium-sized enterprises? Evidence from China," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3412-3424.
    28. Manasa Gopal & Philipp Schnabl, 2022. "The Rise of Finance Companies and FinTech Lenders in Small Business Lending," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 4859-4901.
    29. Aleš Popovič & Ray Hackney & Rana Tassabehji & Mauro Castelli, 2018. "The impact of big data analytics on firms’ high value business performance," Information Systems Frontiers, Springer, vol. 20(2), pages 209-222, April.
    30. Khakan Najaf & Md Imtiaz Mostafiz & Rabia Najaf, 2021. "Fintech firms and banks sustainability: Why cybersecurity risk matters?," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 1-14, June.
    31. de Fontnouvelle, Patrick & Dejesus-Rueff, Virginia & Jordan, John S. & Rosengren, Eric S., 2006. "Capital and Risk: New Evidence on Implications of Large Operational Losses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1819-1846, October.
    32. Rui Wang & Jiangtao Liu & Hang(Robin) Luo, 2021. "Fintech development and bank risk taking in China," The European Journal of Finance, Taylor & Francis Journals, vol. 27(4-5), pages 397-418, March.
    33. Chavez-Demoulin, V. & Embrechts, P. & Neslehova, J., 2006. "Quantitative models for operational risk: Extremes, dependence and aggregation," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2635-2658, October.
    34. Allen, Linda & Bali, Turan G., 2007. "Cyclicality in catastrophic and operational risk measurements," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1191-1235, April.
    35. Awan, Usama & Shamim, Saqib & Khan, Zaheer & Zia, Najam Ul & Shariq, Syed Muhammad & Khan, Muhammad Naveed, 2021. "Big data analytics capability and decision-making: The role of data-driven insight on circular economy performance," Technological Forecasting and Social Change, Elsevier, vol. 168(C).
    36. Murinde, Victor & Rizopoulos, Efthymios & Zachariadis, Markos, 2022. "The impact of the FinTech revolution on the future of banking: Opportunities and risks," International Review of Financial Analysis, Elsevier, vol. 81(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Munther Al-Nimer, 2024. "Innovation Capacity as a Mediating Mechanism Between Strategic Risk Integration and ESG Performance: Evidence from Jordanian Banks," IJFS, MDPI, vol. 12(4), pages 1-21, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Wen & Wu, Weili & Zhang, Tonghui, 2023. "Fintech development, firm digitalization, and bank loan pricing," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    2. Uddin, Md Hamid & Mollah, Sabur & Islam, Nazrul & Ali, Md Hakim, 2023. "Does digital transformation matter for operational risk exposure?," Technological Forecasting and Social Change, Elsevier, vol. 197(C).
    3. Pacelli, Vincenzo & Miglietta, Federica & Foglia, Matteo, 2022. "The extreme risk connectedness of the new financial system: European evidence," International Review of Financial Analysis, Elsevier, vol. 84(C).
    4. Guo, Pin & Zhang, Cheng, 2023. "The impact of bank FinTech on liquidity creation: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    5. Zhao, Yang & Goodell, John W. & Wang, Yong & Abedin, Mohammad Zoynul, 2023. "Fintech, macroprudential policies and bank risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 87(C).
    6. Chen, Xiaojie & He, Guangwen & Li, Qian, 2024. "Can Fintech development improve the financial inclusion of village and township banks? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    7. Liu, Ziqiang & Feng, Qiushuo & Li, Hongyi, 2024. "Digital finance, bank competition shocks and operational efficiency of local commercial banks in Western China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    8. Tang, Mengxuan & Hu, Yang & Corbet, Shaen & Hou, Yang (Greg) & Oxley, Les, 2024. "Fintech, bank diversification and liquidity: Evidence from China," Research in International Business and Finance, Elsevier, vol. 67(PA).
    9. Filippo Curti & W. Scott Frame & Atanas Mihov, 2022. "Are the Largest Banking Organizations Operationally More Risky?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(5), pages 1223-1259, August.
    10. Lu Wei & Jianping Li & Xiaoqian Zhu, 2018. "Operational Loss Data Collection: A Literature Review," Annals of Data Science, Springer, vol. 5(3), pages 313-337, September.
    11. Lei Xu & Qian Liu & Bin Li & Chen Ma, 2022. "Fintech business and firm access to bank loans," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4381-4421, December.
    12. Chernobai, Anna & Ozdagli, Ali & Wang, Jianlin, 2021. "Business complexity and risk management: Evidence from operational risk events in U.S. bank holding companies," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 418-440.
    13. Wan, Siyu & Lee, Yoong Hon & Sarma, Vengadeshvaran J., 2023. "Is Fintech good for green finance? Empirical evidence from listed banks in China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1273-1291.
    14. W. Scott Frame & Ping McLemore & Atanas Mihov, 2020. "Haste Makes Waste: Banking Organization Growth and Operational Risk," Working Papers 2023, Federal Reserve Bank of Dallas.
    15. Guo, Junyan & Fang, Hanqing & Liu, Xuexin & Wang, Cizhi & Wang, Yuan, 2023. "FinTech and financing constraints of enterprises: Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    16. Choudhary, Priya & Thenmozhi, M., 2024. "Fintech and financial sector: ADO analysis and future research agenda," International Review of Financial Analysis, Elsevier, vol. 93(C).
    17. Paul Beaumont & Huan Tang & Éric Vansteenberghe, 2024. "Collateral Effects: The Role of FinTech in Small Business Lending [Effets collatéraux : le rôle des Fintechs dans le financement des petites et moyennes entreprises]," Débats économiques et financiers 42, Banque de France.
    18. Tianlei Pi & Haoxuan Hu & Jingyi Lu & Xue Chen, 2022. "The Analysis of Fintech Risks in China: Based on Fuzzy Models," Mathematics, MDPI, vol. 10(9), pages 1-13, April.
    19. Wang, Haijun & Mao, Kunyuan & Wu, Wanting & Luo, Haohan, 2023. "Fintech inputs, non-performing loans risk reduction and bank performance improvement," International Review of Financial Analysis, Elsevier, vol. 90(C).
    20. Berger, Allen N. & Curti, Filippo & Mihov, Atanas & Sedunov, John, 2022. "Operational Risk is More Systemic than You Think: Evidence from U.S. Bank Holding Companies," Journal of Banking & Finance, Elsevier, vol. 143(C).

    More about this item

    Keywords

    Technological innovation; Operational risk; Financial technology; Operational error;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924004125. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.