Digitalization and bank lending

Abstract

In this study, I document that the level of IT information technology (IT) adoption in banks is positively related to loan loss provision (LLP) timeliness. Utilizing the past number of local banks’ data breach cases as an instrumental variable (IV) for banks’ IT adoption level, I conduct an IV analysis to support that IT adoption in banks can improve timely LLP recognition. This relation is more pronounced for banks with more geographically-dispersed branches and for banks with a high level of digital human capital, which indicates a significant proportion of staff capable of using IT analytical tools to assess bank loan credit risk. I further find that banks’ IT adoption level is positively related to several proxies for banks’ internal information environment quality (i.e., the speed of banks announcing earnings after the fiscal period ends, a lower likelihood of restatements, or of delaying SEC financial report filing). I also find that the IT adoption level of banks is positively associated with the probability of using credit risk models.