High-IT-adoption banks originated mortgages with better performance & did not offload low-quality loans; banks led by more “tech-oriented” managers experienced lower non-performing loans during the crisis

Tech in Fin before FinTech: Blessing or Curse for Financial Stability? Nicola Pierri; Yannick Timmer. IMF Working Paper No. 20/14, January 17, 2020. https://www.imf.org/en/Publications/WP/Issues/2020/01/17/Tech-in-Fin-before-FinTech-Blessing-or-Curse-for-Financial-Stability-48797

Summary: Motivated by the world-wide surge of FinTech lending, we analyze the implications of lenders’ information technology adoption for financial stability. We estimate bank-level intensity of IT adoption before the global financial crisis using a novel dataset that provides information on hardware used in US commercial bank branches after mapping them to their parent bank. We find that higher intensity of IT-adoption led to significantly lower non-performing loans when the crisis hit: banks with a one standard deviation higher IT-adoption experienced 10% lower non-performing loans. High-IT-adoption banks were not less exposed to the crisis through their geographical footprint, business model, funding sources, or other observable characteristics. Loan-level analysis indicates that high-IT-adoption banks originated mortgages with better performance and did not offload low-quality loans. We apply a simple text-analysis algorithm to the biographies of top executives and find that banks led by more “tech-oriented” managers adopted IT more intensively and experienced lower non-performing loans during the crisis. Our results suggest that technology adoption in lending can enhance financial stability through the production of more resilient loans.