A recent IMF Working Paper analysed the relationship between a bank’s IT adoption and its financial resilience during the global financial crisis (GFC). The research identified that “technology adoption in lending can enhance financial stability through the production of more resilient loans”.
This insight potentially has important implications for banks today at a time when regulatory activity is shifting to focus on risks arising from technology.
Banks that increasingly rely on advanced technologies will be exposed to new vulnerabilities, some of which we identified in our paper “Operational resilience and the evolution of the European banking sector”. Operational resilience needs to be managed carefully as it can critically threaten a bank’s overall health if mishandled.
The IMF’s research, however, draws an interesting link between a bank’s investment in its digital transformation and improvements in its financial resilience. Not only does the research find that banks with higher IT adoption originated more resilient loans before the GFC, but also that those banks provided more credit to the economy during the crisis than their less technologically advanced competitors, potentially contributing to financial stability.
Banks today are upgrading their core IT systems and investing in new technologies in order to control costs and keep pace with customer demand. Regulators have repeatedly stressed the importance of embedding operational resilience in these new systems and throughout the transformation process.
The IMF’s research reminds us that the worlds of technology and finance are becoming increasing intertwined. Banks that are leaders in investing in technology may also be better equipped to face future downturns than their less technologically advanced competitors.
Scott Martin and Quentin Mosseray
We show that high-IT-adopters experienced a significantly smaller increase in NPLs on their balance-sheets relative to other banks and provided more credit to the economy during the crisis