Information Technology and Bank Competition

We consider a spatial model of bank competition to study how the diffusion of information technology affects competition in the lending market, stability of the banking sector, and social welfare. We find that the effects of an improvement in information technology depend on whether or not it weakens the influence of bank–borrower distance on monitoring/screening costs. If so, then bank competition intensifies, which reduces bank stability and brings about an ambiguous welfare effect. Otherwise, competition intensity does not vary, banks are more stable, and welfare improves. If banks have local monopolies, then technological progress always improves social welfare.