Banking competition, IT use, and financial stability

Competitive shocks can erode the customer base and thus the information pool of banks. Inferiorinformation quality also reduces the quality of borrowers and may lead to financial instability ofbanks and corporates if risk taking is excessive. Recent theories conjecture that banks can mitigatethe erosion of their information advantages by a more intensive use of information technology (IT).We use a unique dataset on the use of IT for a large sample of regional banks to test the effect ofmore intensive IT use on competition, bank’s information base, and the financial stability of bothbanks and corporates. To account for these endogenous relations, we use a system approach andfind that banks using IT more intensively are more profitable and stable as measured by a lowerdistance to default.[...]