IMF Working Papers

The Anatomy of Banks’ IT Investments: Drivers and Implications

Author/Editor:

Kosha Modi ; Nicola Pierri ; Yannick Timmer ; Maria Soledad Martinez Peria

Publication Date:

December 9, 2022

Electronic Access:

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Summary:

This paper relies on administrative data to study determinants and implications of US banks’ Information Technology (IT) investments, which have increased six-fold over two decades. Large and small banks had similar IT expenses a decade ago. Since then, large banks sharply increased their spending, especially those which were more exposed to competition from fintech lenders. Other local-level and bank-level factors, such as county income and bank income sources, also contribute to explain the heterogeneity in IT investments. Analysis of the mortgage market reveals that fintechs’ lending behavior is more similar to that of non-bank financial intermediaries rather than IT-savvy banks, suggesting that factors other than technology are responsible for the differences between banks and other lenders. However, both IT-savvy banks and fintech lend to lower income borrowers, pointing towards benefits for financial inclusion from higher IT adoption. Banks’ IT investments are also shown to matter for the responsiveness of bank lending to monetary policy.

Series:

Working Paper No. 2022/244

Subject:

Bank credit Financial institutions Fintech Income Loans Money Mortgages National accounts Technology

Frequency:

regular