Bankruptcy risk contagion: considering systemically important FinTech firms

This study addresses the growing concerns surrounding financial technology (FinTech) firms and their impact on financial stability, intensified by recent global shocks such as the COVID-19 pandemic, the Russia–Ukraine war, and bank closures in the US. Despite the expanding FinTech industry and the severity of these shocks, no study has explored the systemic risk dynamics in this sector yet. Employing time-varying parameter vector auto-regressions (TVP-VAR), we assess the systemic risk of key FinTech firms by analyzing their distance to default from 7 April 2016 to 30 June 2022. Our findings reveal a moderate level of connectedness throughout the entire sample period, with weaker ties observed prior to the pandemic. However, during the pandemic and early 2022, we observed increased interconnectedness, likely influenced by the Russia–Ukraine war and US bank runs. Additionally, MasterCard and Visa emerged as primary shock transmitters in our FinTech network, emphasizing their systemic importance due to their high market capitalization and competitive position. The wavelet results reveal the extreme distance-to-default co-movement of the short- and long-term frequency bands. For all the pairs of FinTech firms, the co-movement of default risk is positive, highlighting that no hedging opportunities are available for a portfolio of sampled firms.