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Information technology and banking organization

Information technology and banking organization. Sauro Mocetti*, Marcello Pagnini* & Enrico Sette** Conference on “The Economics of Small Businesses in the Aftermath of the Crisis. Cross-Country Analyses ” Urbino, October 20th – 21st, 2010

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Information technology and banking organization

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  1. Information technology and banking organization Sauro Mocetti*, Marcello Pagnini* & Enrico Sette** Conference on “The Economics of Small Businesses in the Aftermath of the Crisis. Cross-Country Analyses” Urbino, October 20th – 21st, 2010 *Bank of Italy, Regional Economic Research Division, Bologna branch **Bank of Italy, Research Department, Rome

  2. Resesarch project on bank organization and local credit markets The present paper is part of a research project of the Bank of Italy based on a survey on 300 Italian banks The final report describing the main results of the survey and several papers that were also part of the project can be found in the volume: Cannari, Pagnini and Rossi (eds) ,2010, Banks, Local Credit Markets and Credit Supply, n.5, Seminar and conferences, Bank of Italy (downlodable at: www.bancaditalia.it/pubblicazioni/seminari_convegni/banche-mercati-territoriali)

  3. CONTENTS Introduction Luigi Cannari, Marcello Pagnini and Paola Rossi ……………………………….…………. 5 Session 1 NEW TECHNOLOGIES AND BANKING ORGANIZATION 1. The organization of lending and the use of credit scoring techniques in Italian banks: Results of a sample survey Giorgio Albareto, Michele Benvenuti, Sauro Mocetti, Marcello Pagnini and Paola Rossi ………….…………………………………………………….……………. 11 2. Information technology and banking organization Sauro Mocetti, Marcello Pagnini and Enrico Sette ………………………….…………. 49 3. Bank acquisitions and decentralization choices Enrico Beretta and Silvia Del Prete …………………………………………….………. 77 Discussion Elena Beccalli …….………………………………………………..……..…….………. 103 Barbara Chizzolini ….…………………………………………………….…………….. 107 Session 2 BANKING ORGANIZATION AND SMALL BUSINESS LENDING 4. The retail activity of foreign banks: Effects on credit supply to households and firms Luigi Infante and Paola Rossi ………….…………………….….….…………………... 113 5. Debt restructuring and the role of lending technologies Giacinto Micucci and Paola Rossi …………………….……………….……….……… 143 6. Loan officer authority and small business lending. Evidence from a survey Michele Benvenuti, Luca Casolaro, Silvia Del Prete and Paolo Emilio Mistrulli .……. 175 Discussion Angelo Baglioni …….…………………………………………………..…………....…. 193 Paola Bongini …….……………………………………………….……………….....…. 197

  4. MAIN GOALS OF THE PROJECT • A metrics for the bank internal organization in small business lending (power delegation, Credit scoring adoption, LBM tenure,…) • Determinants of the internal organization: ICT, M&A • Effects of organizational choices on credit allocation (financial distress, credit availability for sme, interbank competition)

  5. MAJOR FINDINGS IN A NUTSHELL • sharp differences in bank organization even beyond the traditional divides (small vs large banks) • Bank organization does matter for credit allocation, although in a non trivial way • What comes next? New survey on 2009 Main topic: how did heterogeneous bank organizations react to the crisis?

  6. INTRODUCTION AND MOTIVATIONS (1)New technologies and the role of the LBM • The aim of the paper is to empirically investigates whether and how the introduction of new technologies in banking industry affected the degree of power delegation to the local branch manager (LBM) in small business lending • The issue is relevant because: • primacy of the LBM in small business lending (particularly for firms that are more opaque and difficult to evaluate) • worries about the introduction of ICT & credit scoring and their effects on LBM’s initiative and small business credit conditions

  7. INTRODUCTION AND MOTIVATIONS (2)Literature • The paper is at the crossing of three strands of literature: • Role of LBM in lending activity (Stein 2002; Liberti 2005; Liberti&Mian 2006; Uchida, Udell, Yamori,2009; Agarwal and Hauswald, 2010, Cannari, Pagnini,Rossi, 2010,Hertzberg, Liberti, Paravisini, 2010) • Effects of new technologies – including credit scoring – in banking industry and lending activity (Berger 2003; Berger et al. 2005; Casolaro&Gobbi 2006; Felici&Pagnini 2008) • Impact of new technologies on firm organization (Brynjolfsson&Hitt 1998; Bresnahan et al. 2002, Colombo&Delmastro 2004, Bloom et al. 2009)

  8. THEORETICAL FRAMEWORK (1)A graphical illustration LBM HEADQUARTER

  9. THEORETICAL FRAMEWORK (2)Centralization vs. decentralization Decentralization(power delegation) vs. Centralization(transmission of information)

  10. THEORETICAL FRAMEWORK (3)(ambiguous) impact of new technologies • Further channels: • IT might reduce the costs of acquiring information locally • IT might substitute LBM in manual activities thus increasing efficiency of cognitive interactive tasks • Other channels… IT reduce monitoring coststhus leading to more delegation IT reduce costs for acquiring and processing information for the CEO thus leading to more centralization

  11. THE MODEL (1)Aim of the model • Sketch these ideas in a (super) simple principal-agent model • Show the ambiguity in IT-delegation relationship • Get an estimable (linear) equation

  12. THE MODEL (4)Estimable equation Bank size, distance, etc. Adoption of credit scoring Delegation ICT capital stock per employee in 2003

  13. DATA AND VARIABLES (1)Data sources • Sample: about 300 banks in 2006 • Sources: • Bank of Italy survey on the distribution of power delegation across hierarchical levels within the bank organization and credit scoring adoption in small business lending (Albareto el al. 2010) • Bank of Italy Supervisory reports: balance sheet data on bank size and profitability, hardware and software investment flows, etc.

  14. DATA AND VARIABLES (2)IT variables • ICT capital stock per employee • Hardware, software and premises for computing equipment. It has been computed using the perpetual inventory method • Adoption of credit scoring • Discrete variable: 1=no adoption of CS; 2=adoption of CS in the last 3 years; 3=adoption of CS since at least 3 years

  15. DATA AND VARIABLES (3)LBM’s power delegation Maximum amount of loan that can be granted in autonomy by the LBM. Power delegation refers to applicants exhibiting a risk level that a bank judge a priori as normal Maximum amount of loan that can be granted in autonomy by the LBM normalized with respect that of the CEO

  16. DATA AND VARIABLES (4)Further variables

  17. EMPIRICAL ANALYSIS (1)The econometric set-up • Cross section of approx. 300 banks in 2006 • ‘Static’ analysis: Do differences in the intensity of IT adoption across banks explain the variation in the amount of power delegated to the LBM in SME lending?

  18. EMPIRICAL ANALYSIS (2)Main findings

  19. EMPIRICAL ANALYSIS (3)Robustness checks

  20. EMPIRICAL ANALYSIS (4)IV estimates • IV variables: • Lagged variable for ICT capital stock • “Household” credit scoring for “small business” credit scoring

  21. EMPIRICAL ANALYSIS (5)A synthesis of the results • Banks equipped with more ICT capital delegate more • Banks adopting credit scoring also enlarge the level of delegation to LBM • Results are robust to many additional controls including IV estimates • Further results (see the paper): • New technologies take time to exert their effects (because of learning costs and uncertainty surrounding their returns) • Impact of ICT capital is stronger for banks adopting credit scoring (positive complementarities) • Impact of new technologies on delegation is stronger for banks that are more specialized in small business lending

  22. CONCLUSIONSOur interpretation of the results • ICT forces pushing toward decentralization (falling monitoring costs) prevail over those moving in the opposite direction (falling information transmission costs) • Worries about the introduction of ICT and its negative effects on bank-firm relationships were exaggerated. • Re-definition of the role of LBM: thanks to the pre-screening activity of the scoring and the computerization of routine tasks, the LBM can focus on cognitive and interactive tasks (e.g. analysis of “border” lending practices)

  23. What comes next? Lessons for and from the crisis • How did heterogeneous bank organizations face the recent crisis? • Which consequences for sme credit availability and costs? • Had the crisis an impact on bank organization? And If so, how? • …

  24. sauro.mocetti@bancaditalia.it marcello.pagnini@bancaditalia.it enrico.sette@bancaditalia.it Thanks for your attention!

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