Working Paper: NBER ID: w30403
Authors: Zhiguo He; Sheila Jiang; Douglas Xu; Xiao Yin
Abstract: Banks’ lending technology hinges on their handling of soft and hard information in dealing with different types of credit demand. Through assembling a novel dataset on banks’ investment in information technologies (IT), this paper provides concrete empirical evidence on how banks adapt their lending technologies. We find investment in communication IT is associated with improving banks’ ability to produce and transmit soft information, while investment in software IT helps enhance banks’ hard information processing capacity. We exploit policies that affect geographic regions differentially to show causally that banks respond to an increased demand for small business credit (mortgage refinance) by increasing their spending on communication (software) IT spending. We also find that the entry of fintech induces commercial banks to increase their investment in IT—more so in the software IT category.
Keywords: IT Spending; Banking Technology; Fintech Competition; Lending Technologies
JEL Codes: G21; G51; O12; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment in communication IT (L86) | Banks' ability to process and transmit soft information (G21) |
| Investment in software IT (C88) | Hard information processing capabilities (D83) |
| Increase in demand for small business loans (G21) | Rise in communication IT spending (L96) |
| Positive demand shock for mortgage refinancing (E47) | Increased software IT investments (L86) |
| Higher refinance demand (G51) | Increase in software IT spending (L86) |
| Entry of fintech companies (G29) | Increase in IT investments by traditional banks (O16) |