DP16258 Information Technology and Bank Competition

Author(s): Xavier Vives, Zhiqiang Ye
Publication Date: June 2021
Date Revised: July 2021
Keyword(s): Bank stability, Big Data, credit, deposit insurance, Fintech, monitoring/screening, price discrimination, Regulation
JEL(s): G21, G23, I31
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16258

We consider a spatial model of bank competition to study how the diffusion of information technology affects competition in the lending market, stability of the banking sector, and social welfare. We find that the effects of an improvement in information technology depend on whether or not it weakens the influence of bankâ??borrower distance on monitoring/screening costs. If so, then bank competition intensifies, which reduces bank stability and brings about an ambiguous welfare effect. Otherwise, competition intensity does not vary, banks are more stable, and welfare improves. If banks have local monopolies, then technological progress always improves social welfare.