DP16258 Information Technology and Bank Competition
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 bank–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.