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Journal of Financial Stability
Year: 2013  |  Volume: 9  |  Issue: 4  |  Page No.: 695 - 704

IT use, productivity, and market power in banking

Michael Koetter and Felix Noth    

Abstract: Information management is a core process in banking that can resolve information asymmetries and thereby help to mitigate competitive pressure. We test if the use of information technology (IT) contributes to bank output, and how IT-augmented bank productivity relates to differences in market power. Detailed bank-level information on the use of IT reveals a substantial upward bias in bank productivity estimates when ignoring banks‘ IT expenditures. IT-augmented bank productivity correlates positively with Lerner markups. A mere increase in IT expenditures, however, reduces markups. Results hold across a range of bank output definitions and productivity estimation methods.

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