Central bank digital currency (CBDC) is intended to boost financial inclusion and limit threats to bank stability posed by private cryptocurrencies. Our study examines the impact of implementing CBDC on the bank stability of two countries in Asia and the Pacific, the People’s Republic of China (PRC) and India, that initiated research on CBDC within the last ten years (2013 to 2022). We construct a bank stability index by utilizing five dimensions, namely capital adequacy, profitability, asset quality, liquidity, and efficiency, using a novel “benefit-of-the-doubt” approach. Employing panel estimation techniques, we find a significant positive impact of adopting CBDC on bank stability and a moderating role of monetary policy. We also find that the effect is greater in India, a lower-middle-income country, than in the PRC, an upper-middle-income nation. We conclude that by taking an accommodative monetary policy stance, adopting CBDC favors bank stability. We confirm our results with various robustness tests by introducing proxies for bank stability and other model specifications. Our findings underscore the potential of adopting CBDC, when carefully managed alongside appropriate monetary policy, for enhancing bank or overall financial stability.

Compared to previous literature on external FinTech, this paper is more interested in the role played by bank FinTech. Based on panel data from Chinese commercial banks spanning 2010 to 2021, this paper investigates the impact of digital transformation on bank soundness and its potential mechanisms. The empirical findings demonstrate a positive association between digital transformation and bank soundness, driven primarily by strategic and management digitization. Mechanistic analysis indicates that digital transformation improves bank soundness by mitigating risk-taking behavior and promoting diversification. The positive effect of digital transformation is more pronounced in state-owned and joint-stock banks, banks with higher liquidity mismatch as well as in sub-samples with greater levels in external FinTech development and economic policies uncertainty. Additional analysis suggests that digital transformation can still enhance bank soundness even in the presence of relatively easy monetary and macroprudential policies, highlighting the harmonization and complementarity between internal innovation from digital transformation and external regulatory policies in maintaining banking stability. Overall, this paper contributes to the literature on bank FinTech, factors influencing bank stability. And it also provides a novel explanation for the relationship between financial innovation and financial stability.

Deregulation may increase bank stability. Employing China’s loan-to-deposit ratio (LDR) reform in 2015, we show that the deregulation of the LDR increases the stability of banks. Specifically, the deregulation of the LDR alleviates banks’ deposit competition, and decreases reliance on customer deposit funding. By doing so, it improves the loan structure among banks with a high LDR, which, in turn, increases the on-balance-sheet stability of these banks. Meanwhile, the deregulation of the LDR curbs high-LDR banks’ impulse to issue principal-floating wealth management products, a form of shadow banking, which thus increases their off-balance-sheet stability.