Effect of artificial intelligence on banking stability: Evidence from developed countries

• The study investigates the effect of artificial intelligence (AI) on banking stability in 29 developed countries from 2017 to 2021. • Artificial intelligence has a positive and significant impact on banking stability. • The effect of AI becomes stronger when the capital adequacy ratio exceeds the threshold of 7.95%. • The influence of AI remains robust across different quantiles of banking stability. • Policy recommendations encourage further investment in AI to enhance banking stability in developed economies. This article investigates the effect of artificial intelligence on banking stability in developed countries. The study uses panel data from 29 developed countries over the period 2017 to 2021. To analyze the data, a threshold model combined with quantile regression and the local projection method was employed. The results show that artificial intelligence positively influences banking stability in developed countries. However, this effect depends on the level of banking regulation: when the capital adequacy ratio reaches a critical threshold of 7.95%, the impact of artificial intelligence on banking stability becomes significantly stronger. Moreover, this effect varies but remains robust across different quantiles of banking stability within financial institutions. Finally, using the local projection method, the results reveal that a one-time shock in investment in artificial intelligence leads to a statistically significant positive effect on banking stability three years after the shock. In conclusion, this article offers economic policy recommendations aimed at encouraging investment in artificial intelligence to strengthen banking stability in developed countries.