The Nexus of Financial Access and Financial Stability: The Role of Financial Infrastructure
This work was supported by a grant of Ministery of Research and Innovation, CNCS - UEFISCDI,
project number PN-III-P1-1.1-TE-2016-1855, within PNCDI III
In the last years, an increasing number of authorities prioritized the policies of financial inclusion. Recent contributions to systemic risk literature highlight that greater financial inclusion has both positive and negative consequences on financial stability, but the empirical literature is still limited.
The purpose of this project is to provide a framework that permits to assess the interplay between financial inclusion, financial stability and financial infrastructure.
Our main research question is: Can greater access to finance and optimal financial infrastructure provide potential benefits to enhance financial stability? Our foremost contribution will be related to identifying the channels that could shape the impact of financial inclusion on stability and possible particularities of the relationship. In this context, our aim is twofold.
Objective 1. First, we will assess the impact of financial inclusion on the safety and soundness of the banking system, considering both access to finance and the utilization of financial services. We are looking forward to provide evidence for the following issues: (i) estimate the impact of financial inclusion on banks’ risk taking (microprudential perspective); (ii) estimate the impact of financial inclusion on bank’ contribution to systemic risk (macroprudential perspective); (iii) assess if the impact is heterogeneous across firms (SMEs) and households; (iv) identify the channels that could shape the relationship between financial inclusion and banking sector stability.
Objective 2. Second, we will investigate how the recent global financial crisis influenced financial infrastructure and financial access: are financial intermediaries more circumspect and more reluctant to finance the economy? We are looking forward to provide evidence for the following issues: (i) assess the impact of financial crises on the financial infrastructure from access to finance perspective; (ii) estimate the impact of the financial crises on the access to finance, both at the households and firms level; (iii) assess the financial infrastructure and competition level across European financial systems; (iv) estimate the impact of competition on the access to finance and empirically test for the Market Power Hypothesis against the Information Hypothesis; (v) investigate the impact of regulatory changes on the access to finance.
Our project has the potential to significantly influence the scientific field as there is no previous evidence regarding the impact of financial infrastructure on the relationship between financial inclusion and stability. Second we will open a new research direction on systemic risk and financial inclusion. In terms of policy implications, banks can focus on business models and infrastructure that promote new financial services to households and SMEs and can implement proper governance practices that limit their exposure to systemic events. National supervisory authorities can design an optimal financial infrastructure and identify the policies that enhance the effectiveness of financial inclusion on financial stability.
Our sample will include the period between 2005 and 2016 and the domestic systemically important banks from European countries. We will assess financial stability from both micro and macro prudential perspectives by estimating banks’ risk-taking and contribution to systemic risk. The impact of financial inclusion on bank-risk taking and systemic risk will be assessed in a panel framework using bank-level as well as macro-level data.