DP16258 Information Technology and Bank Competition

Author(s): Xavier Vives, Zhiqiang Ye
Publication Date: June 2021
Date Revised: December 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

In a spatial model of bank competition, we study how information technology (IT) affects lending competition, stability, and welfare. The effects of an IT improvement depend on whether or not it weakens the influence of bankâ??borrower distance on monitoring costs. If so, then bank competition intensifies, which can reduce banks' profitability and stability and have an ambiguous welfare effect. Otherwise, competition intensity does not vary, improving the profitability and stability of banks and welfare. Banks will acquire the best possible IT if it is cheap enough; otherwise, different types of IT investment co-move in response to shocks.