Why Fintech Changes the Effectiveness of Financial Regulation

In the past decade, fintech (financial technology) has been the core reason for innovation in the financial system and its evolution. This has reduced costs, improved efficiency, and created entirely new categories of financial products and services.

But from the government and regulators’ point of view, fintech is often seen as a potential risk. Compared to traditional banks, insurance companies, and investment funds, they will often see fintech as more likely to allow illegal transactions or create systemic risks.

However, this is not so simple in practice. For example, better financial infrastructures can instead improve a country’s economic resilience, as long as they are properly set up.

A new study by researchers at Xi’an Jiaotong University (China), China University of Geosciences, and University of Quebec (Canada) shows that, on average, financial innovation strengthens the effectiveness of macroprudential policy, itself a factor in reducing country-level financial risk. They also found that this effect varies by region.

They published their findings in Finance Research Letters¹, under the title “Macroprudential policy and financial risk: The moderating role of financial innovation”.

Financial Stability & Crises

As a rule of thumb, it is always after a financial crisis that regulators tighten the screws on the financial sectors, regulating new products and services, or putting back in place regulation that had been previously relaxed.

For example, the 2008 global financial crisis revealed significant shortcomings in microprudential regulation (firm-level financial supervision) and highlighted the importance of adopting a system-wide perspective (macroprudential policy) to maintain financial stability.

“By shifting regulatory focus from individual stability to overall financial-system resilience, it seeks to restrain risk accumulation in booms and cushion risk unwinding in downturns, thereby enhancing financial stability”

At the same time, the period after 2008 has been one of intense financial innovation, under the direction of the “fintech” sector. As such, it is an open question whether financial innovation is helping or hindering macroprudential policy in reducing systemic risks.

Analyzing Fintechs’ Effects On Financial Regulation

Tighter Regulations Mean Greater Resilience

The researchers gathered data from a panel of OECD countries from 1990 to 2021, with key data extracted from official databases:

• Financial risk was measured using the ICRG index.
• Macroprudential policy was assessed initially from the LTV ratio, and then from the IMF iMaPP database.
• Financial innovation was estimated by R&D expenditures in financial intermediation.

Additional macroeconomic data were obtained from the WDI, WGI, and IMF IFS databases.

The first element that emerged from these data is that tighter macroprudential regulation is directly associated with lower external financial vulnerability, a general assessment covering various risk factors like external debt burden, debt-service capacity, international liquidity, and exchange-rate stability.

Overall, this supports the idea that restraining excessive credit expansion and leverage accumulation can reduce dependence on external financing and strengthen resilience to capital-flow reversals and exchange-rate shocks.

When expanding the analysis from OECD countries to the full set of available economies, this finding stays consistent. So this effect is not confined to advanced economies but also holds across a broader range of countries.

Alternative measures of the macroprudential policy index, like the IMF’s MaPP index, which summarizes tightening and loosening actions across 17 macroprudential instruments, also produced similar results. The same was true when measuring domestic banking-system stability using banks’ Z-score from the World Bank’s Global Financial Development Database.

Role Of Financial Innovation

A more surprising discovery in this study is that financial innovation strengthens the risk-reducing effect of macroprudential policy.

This goes contrary to the idea that financial innovation is linked to higher risks from less tight control and the creation of new unregulated or poorly regulated markets.

Interestingly, financial innovation alone is not correlated with a reduction in systemic risks. So it seems that this positive effect is entirely mediated by boosting the effectiveness of macroprudential policy instead.

An Eurozone Effect On Fintechs?

In Europe, the Eurozone and non-Eurozone countries are subject to strong differences in regulatory coordination and national policy autonomy. So it can be enlightening to observe if the effect of financial innovation differs between these countries.

“In the Eurozone, macroprudential supervision operates within a more integrated monetary and supervisory framework under the ECB and ESRB, which may limit the marginal role of domestic financial innovation in shaping national macroprudential effectiveness. By contrast, non-Eurozone countries generally retain greater national policy autonomy and regulatory flexibility.”

It seems that in the Eurozone, the effect of financial innovation in reducing systemic risk is not zero, but not really statistically significant. In contrast, non-Eurozone countries seem to be able to leverage financial innovation more directly to improve information processing, risk identification, credit assessment, regulatory compliance, and policy transmission.

“This finding suggests that the complementarity between financial innovation and macroprudential regulation may be stronger when national authorities have greater discretion to adjust prudential tools to domestic financial conditions.”

Bank-Driven Vs Market-Driven Economies

Another level of analysis is to compare bank- and market-driven economies. Each differs in the way financial innovation is deployed into the broader economy.

In bank-driven economies, financial innovation is more often embedded in credit assessment, payment systems, and risk management, which may enhance stability.

In market-driven economies, innovation is more likely to take the form of securitization, derivatives, and investment vehicles, which may increase volatility and procyclicality.

These expectations were confirmed by the study, as it showed that in bank-driven economies, financial innovation reinforces the risk-reducing effect of macroprudential policy.

In contrast, in market-driven economies, innovation weakens prudential effectiveness by shifting credit creation and risk-taking away from traditional banking channels and reducing the effectiveness of borrower-based tools such as LTV limits.

Investors Takeaways

It is often assumed that fintech-driven innovation leads to higher systemic risks, as it shifts financial activity away from tightly-controlled “traditional” financial institutions to newer, more innovative, and less regulated fintech companies.

This is important for investors, as a dynamic fintech-rich economy could also mean an economy and market more vulnerable to systemic shocks.

In practice, it instead seems that countries that have adopted macroprudential policy targeting systemic risks, and not just firm-level risks, could benefit from fintech-driven financial innovation, as fintech will boost the efficiency of these policies.

However, even if this average is true, it contains several more important details. This has been more accurate in non-Eurozone countries, and also more in bank-driven economies. So the expectation of reduced systemic risks should be linked to the right context (local control over regulatory policy and/or a bank-driven financial system), and not be expected to happen everywhere.

Still, it proves that financial innovation and fintech companies can actually reduce risks, if in the right context and linked to the right regulatory framework.

Investing In Financial Risk Management

Moody’s Corporation

Predicting the risk of an unexpected crisis at the country or company level has always been an essential part of the work of investors, lenders, and financial experts in general.

In modern times, a lot of this task is delegated to rating agencies who have the expertise, data access, and reputation to make neutral, reliable calls on a company’s solvency, a bank’s balance sheet safety, a sector’s economic health, or a country’s financial stability.

One leading rating agency is Moody’s, which operates across credit ratings, sovereign analysis, financial intelligence, and risk modeling. Within Moody’s Investors Service, the Corporate Finance Group (DFG) is its largest revenue contributor, accounting for approximately half of the segment’s revenue during the second quarter of 2026, followed by Structured Finance Group (SFG), Financial Institutions Group (FIP), and Public, Project, and Infrastructure Finance(PPIF).

Source: Moody’s

By reducing information gaps between issuers and investors, widely recognized credit ratings can improve market access and potentially lower borrowing costs. Even a modest reduction in the interest rate attached to a large bond issuance can produce substantial savings over its lifetime.

Source: Moody’s

While AI models can be used to predict risks and forecast eventual crises, the certainty that the prediction is accurate is extremely important when billions are at play. So Moody’s is embracing AI, letting such technological advances be commercialized as interpretable financial-risk analytics, with the backing of an established provider of risk analysis already trusted for decades.

What provides a key advantage to Moody’s in using AI for mapping financial risk is not just its reputation, but direct access to one of the world’s largest curated and controlled datasets covering everything from patents to M&A deals, financial sentiment, economic data, individual company analysis, or even climate analytics.

Source: Moody’s

So overall, Moody’s is a good way to get exposure to the type of risk analysis using AI to predict debt crises and other types of financial crises.

Latest Moody’s Corporation (MCO) Stock News and Developments

Study Referenced

^{1.  Jinghao Yang, Jun Wen, Xinxin Zhao, and Xiaozhou Zhou. Macroprudential policy and financial risk: The moderating role of financial innovation. Finance Research Letters. December 2026. Article: 110880. Volume 113. 10.1016/j.frl.2026.110880}