The nonlinear fintech-financial stability nexus in Asia-Pacific and the Middle East: When institutional quality and financial efficiency matter

This study examines the nonlinear relationship between fintech development and financial stability, highlighting the moderating roles of institutional quality and financial efficiency. Using data from 15 Asia-Pacific and Middle Eastern countries over 2010–2021, we document a robust cubic (S-shaped) fintech-stability nexus. At low levels of fintech, stability declines due to heightened competition, operational risks, and limited adaptive capacity. Once fintech surpasses the first threshold, stability improves through efficiency gains, diversification, and enhanced risk management. Beyond the second threshold, however, fintech again undermines stability as excessive intensity generates complexity, cyber risks, and regulatory gaps. Institutional quality and financial efficiency amplify both stabilizing and destabilizing phases, acting not only as buffers but also as multipliers of systemic sensitivity. Heterogeneity tests show that the cubic pattern is stronger in developing, low-growth, and less open economies, particularly where financial inclusion is low but financial depth is high. At the bank level, smaller, less diversified, and high-net interest margin banks exhibit sharper nonlinear responses. These findings underscore the need for stage-specific regulation that balances innovation and resilience, especially in emerging markets, and for aligning fintech growth with institutional and financial system strength to sustain stability.