Hostname: page-component-848d4c4894-xfwgj Total loading time: 0 Render date: 2024-06-21T19:42:01.588Z Has data issue: false hasContentIssue false
  • English
  • Français

Stress Testing Banks’ Digital Capabilities: Evidence from the COVID-19 Pandemic

Published online by Cambridge University Press:  25 September 2023

Alan Kwan ,
Chen Lin Open the ORCID record for Chen Lin [Opens in a new window] ,
Vesa Pursiainen  and
Mingzhu Tai
Alan Kwan
Affiliation:
University of Hong Kong Faculty of Business and Economics apkwan@hku.hk
Chen Lin*
Affiliation:
University of Hong Kong Faculty of Business and Economics
Vesa Pursiainen
Affiliation:
University of St.Gallen and Swiss Finance Institute vesa.pursiainen@unisg.ch
Mingzhu Tai
Affiliation:
University of Hong Kong Faculty of Business and Economics taimzh@hku.hk
*
chenlin1@hku.hk (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Banks’ information technology (IT) capabilities affect their ability to serve customers during the COVID-19 pandemic, which generates an unexpected and unprecedented shock that shifts banking services from in-person to digital. Amid mobility restrictions, banks with better IT experience larger reductions in physical branch visits and larger increases in website traffic, implying a larger shift to digital banking. Stronger IT banks are able to originate more Paycheck Protection Program loans to small business borrowers, especially in areas with more severe COVID-19 outbreaks, higher internet use, and higher bank competition. Those banks also attract more deposit flows and receive better mobile customer reviews during the pandemic.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 29
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Sumit Agarwal, Christoph Basten, Diana Bonfim, Martin Brown, Murillo Campello, Sebastian Doerr, Mara Faccio (the editor), Andreas Fuster, Tobin Hanspal, Christoph Herpfer, Yiping Huang, Andrew Karolyi, Xiang Li, Mrinal Mishra, Deniz Okat, Steven Ongena, Mikael Paaso, Yu Shan, David Solomon, and Yannick Timmer, as well as conference participants at the 2020 Shanghai-Edinburgh Fintech Conference, 2021 Columbia SIPA/BPI Bank Regulation Research Conference, 2021 CEBRA Annual Meeting, 2021 ADBI-ADB-CCAF Conference on “Fintech and COVID-19,” 2021 Biennial IADI Research Conference, 2021 IWH-FIN-FIRE Workshop on “Challenges to Financial Stability,” 2021 Swiss Winter Conference on Financial Intermediation, 2021 GdRE International Symposium on Money, Banking and Finance, and 2021 UZH Workshop on Sustainable Banking, as well as seminar participants at ACPR – Banque de France, Concordia University, WU Vienna University of Economics and Business, and Kyiv School of Economics for helpful comments. Kwan acknowledges support from the Research Grant Council of the Hong Kong SAR, China (Project #C7105-20G). Lin acknowledges the financial support from the National Natural Science Foundation of China (Project No. 72192841) and the Research Grant Council of the Hong Kong SAR, China (Project No. T35-710/20-R).

References

Adalja, A. A.; Toner, E.; and Inglesby, T. V.. “Priorities for the US Health Community Responding to COVID-19.” JAMA - Journal of the American Medical Association, 21202 (2020), 2019–2020.Google Scholar
Allcott, H.; Boxell, L.; Conway, J.; Gentzkow, M.; Thaler, M.; and Yang, D.. “Polarization and Public Health: Partisan Differences in Social Distancing During the Coronavirus Pandemic.” Journal of Public Economics, 191 (2020), 104,254.10.1016/j.jpubeco.2020.104254CrossRefGoogle Scholar
Alstadsæter, A.; Bjørkheim, J. B.; Kopczuk, W.; and Økland, A.. “Norwegian and US Policies Alleviate Business Vulnerability Due to the COVID-19 Shock Equally Well.” National Tax Journal, 73 (2020), 805–828.Google Scholar
Andersen, A. L.; Hansen, E. T.; Johannesen, N.; and Sheridan, A.. “Consumer Responses to the COVID‐19 Crisis: Evidence from Bank Account Transaction Data.” Scandinavian Journal of Economics, 124 (2022), 905–929.Google Scholar
Baker, S. R.; Farrokhnia, R. A.; Meyer, S.; Pagel, M.; and Yannelis, C.. “How Does Household Spending Respond to an Epidemic? Consumption During the 2020 COVID-19 Pandemic.” Review of Asset Pricing Studies, 10 (2020), 834–862.Google Scholar
Balyuk, T.; Prabhala, N.; and Puri, M.. “Indirect Costs of Government Aid and Intermediary Supply Effects: Lessons from the Paycheck Protection Program.” NBER Working Paper No. 28114 (2020).10.3386/w28114Google Scholar
Bao, Z., and Huang, D.. “Shadow Banking in a Crisis: Evidence from FinTech During COVID-19.” Journal of Financial and Quantitative Analysis, 56 (2021), 2320–2355.10.1017/S0022109021000430CrossRefGoogle Scholar
Bartik, A. W.; Bertrand, M.; Cullen, Z.; Glaeser, E. L.; Luca, M.; and Stanton, C.. “The Impact of COVID-19 on Small Business Outcomes and Expectations.” Proceedings of the National Academy of Sciences, 117 (2020a), 17,656–17,666.CrossRefGoogle ScholarPubMed
Bartik, A. W.; Cullen, Z. B.; Glaeser, E. L.; Luca, M.; Stanton, C. T.; and Sunderam, A.. “The Targeting and Impact of Paycheck Protection Program Loans to Small Businesses.” NBER Working Paper No. 27623 (2020b).CrossRefGoogle Scholar
Bartlett, R.; Morse, A.; Stanton, R.; and Wallace, N.. “Consumer-Lending Discrimination in the FinTech Era.” Journal of Financial Economics, 143 (2022), 30–56.Google Scholar
Basten, C., and Ongena, S.. “The Geography of Mortgage Lending in Times of FinTech.” Working Paper, University of Zurich (2020).10.2139/ssrn.3434966Google Scholar
Beccalli, E. “Does IT Investment Improve Bank Performance? Evidence from Europe.” Journal of Banking & Finance, 31 (2007), 2205–2230.CrossRefGoogle Scholar
Bennedsen, M.; Larsen, B.; Schmutte, I.; and Scur, D.. “Preserving Job Matches During the COVID-19 Pandemic: Firm-Level Evidence on the Role of Government Aid.” Covid Economics, 27 (2020), 1–32.Google Scholar
Berg, T.; Burg, V.; Gombović, A.; and Puri, M.. “On the Rise of FinTechs: Credit Scoring Using Digital Footprints.” Review of Financial Studies, 33 (2020), 2845–2897.CrossRefGoogle Scholar
Berger, A. N. “The Economic Effects of Technological Progress: Evidence from the Banking Industry.” Journal of Money, Credit and Banking, 35 (2003), 141–176.CrossRefGoogle Scholar
Berger, A. N., and DeYoung, R.. “Technological Progress and the Geographic Expansion of the Banking Industry.” Journal of Money, Credit and Banking, 38 (2006), 1483–1513.CrossRefGoogle Scholar
Bian, B.; Li, J. L.; Xu, T.; and Foutz, N. Z.. “Individualism During Crises.” Review of Economics and Statistics, 104 (2022), 368–385.CrossRefGoogle Scholar
Bonfim, D.; Nogueira, G.; and Ongena, S.. ““Sorry, We’re Closed” Bank Branch Closures, Loan Pricing, and Information Asymmetries.” Review of Finance, 25 (2021), 1211–1259.CrossRefGoogle Scholar
Borusyak, K.; Jaravel, X.; and Spiess, J.. “Revisiting Event Study Designs: Robust and Efficient Estimation.” Working Paper, Stanford University (2022).Google Scholar
Branzoli, N.; Rainone, E.; and Supino, I.. “The Role of Banks’ Technology Adoption in Credit Markets During the Pandemic.” Working Paper, Bank of Italy (2023).CrossRefGoogle Scholar
Buchak, G.; Matvos, G.; Piskorski, T.; and Seru, A.. “Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks.” Journal of Financial Economics, 130 (2018), 453–483.CrossRefGoogle Scholar
Charoenwong, B.; Kwan, A.; and Pursiainen, V.. “Social Connections with COVID-19-Affected Areas Increase Compliance with Mobility Restrictions.” Science Advances, 6 (2020), 1–10.CrossRefGoogle ScholarPubMed
Core, F., and De Marco, F.. “Information Technology and Credit: Evidence from Public Guarantees.” Management Science, forthcoming (2023).Google Scholar
D’Acunto, F.; Prabhala, N.; and Rossi, A. G.. “The Promises and Pitfalls of Robo-Advising.” Review of Financial Studies, 32 (2019), 1983–2020.CrossRefGoogle Scholar
D’Andrea, A., and Limodio, N.. “High-Speed Internet, Financial Technology and Banking in Africa.” Management Science, forthcoming (2023).CrossRefGoogle Scholar
Danisewicz, P., and Elard, I.. “The Real Effects of Financial Technology: Marketplace Lending and Personal Bankruptcy.” Working Paper, Tilburg University (2022).CrossRefGoogle Scholar
Degryse, H., and Ongena, S.. “Distance, Lending Relationships, and Competition.” Journal of Finance, 60 (2005), 231–266.CrossRefGoogle Scholar
Ding, W.; Levine, R.; Lin, C.; and Xie, W.. “Social Distancing and Social Capital: Why US Counties Respond Differently to COVID-19.” NBER Working Paper No. 27393 (2020).CrossRefGoogle Scholar
Erel, I., and Liebersohn, J.. “Does FinTech Substitute for Banks? Evidence from the Paycheck Protection Program.” NBER Working Paper No. 27659 (2020).CrossRefGoogle Scholar
Fu, J., and Mishra, M.. “Fintech in the Time of COVID-19: Technological Adoption During Crises.” Journal of Financial Intermediation, 50 (2022), 100,945.CrossRefGoogle Scholar
Fuster, A.; Goldsmith-Pinkham, P.; Ramadorai, T.; and Walther, A.. “Predictably Unequal? The Effects of Machine Learning on Credit Markets.” Journal of Finance, 77 (2022), 5–47.CrossRefGoogle Scholar
Fuster, A.; Plosser, M.; Schnabl, P.; and Vickery, J.. “The Role of Technology in Mortgage Lending.” Review of Financial Studies, 32 (2019), 1854–1899.CrossRefGoogle Scholar
He, Z.; Jiang, S.; Xu, D.; and Yin, X.. “Investing in Lending Technology: IT Spending in Banking.” Working Paper, University of Chicago (2021).CrossRefGoogle Scholar
Herpfer, C.; Mjøs, A.; and Schmidt, C.. “The Causal Impact of Distance on Bank Lending.” Management Science, 69 (2022), 1–18.Google Scholar
Howell, S. T.; Kuchler, T.; Snitkof, D.; Stroebel, J.; and Wong, J.. “Lender Automation and Racial Disparities in Credit Access.” NBER Working Paper No. 29364 (2021).CrossRefGoogle Scholar
Humphries, J. E.; Neilson, C.; and Ulyessea, G.. “The Evolving Impacts of COVID-19 on Small Businesses Since the CARES Act.” Working Paper, Yale University (2020).CrossRefGoogle Scholar
Iyer, R.; Khwaja, A. I.; Luttmer, E. F. P.; and Shue, K.. “Screening Peers Softly: Inferring the Quality of Small Borrowers.” Management Science, 62 (2016), 1554–1577.CrossRefGoogle Scholar
Jay, J.; Bor, J.; Nsoesie, E. O.; Lipson, S. K.; Jones, D. K.; Galea, S.; and Raifman, J.. “Neighbourhood Income and Physical Distancing During the COVID-19 Pandemic in the United States.” Nature Human Behaviour, 4 (2020), 1294–1302.CrossRefGoogle ScholarPubMed
Keil, J., and Ongena, S.. “It’s The End of Bank Branching As We Know It (And We Feel Fine).” Technical Report, Swiss Finance Institute Research Paper No. 20-83 (2020).CrossRefGoogle Scholar
Koetter, M., and Noth, F.. “IT Use, Productivity, and Market Power in Banking.” Journal of Financial Stability, 9 (2013), 695–704.CrossRefGoogle Scholar
Kreiss, K. “Bank Branches and COVID-19: Where are Banks Closing Branches During the Pandemic?” FEDS Notes, Dec. 17, 2021 (2021).Google Scholar
Kwan, A., and Matthies, B.. “Measuring Remote Knowledge Work Using Big Data.” Working Paper, University of Hong Kong (2022).Google Scholar
Lewis, M.; Liu, Y.; Goyal, N.; Ghazvininejad, M.; Mohamed, A.; Levy, O.; Stoyanov, V.; and Zettlemoyer, L.. “Bart: Denoising Sequence-to-Sequence Pre-training for Natural Language Generation, Translation, and Comprehension.” Technical Report, arXiv preprint arXiv:1910.13461 (2019).Google Scholar
Li, L., and Strahan, P. E.. “Who Supplies PPP Loans (and Does It Matter)? Banks, Relationships, and the COVID Crisis.” Journal of Financial and Quantitative Analysis, 56 (2021), 2411–2438.CrossRefGoogle Scholar
Lin, C.; Ma, C.; Sun, Y.; and Xu, Y.. “The Telegraph and Modern Banking Development, 1881–1936.” Journal of Financial Economics, 141 (2021), 730–749.CrossRefGoogle Scholar
Nguyen, H.-L. Q. “Are Credit Markets Still Local? Evidence from Bank Branch Closings.” American Economic Journal: Applied Economics, 11 (2019), 1–32.Google Scholar
Paaso, M.; Pursiainen, V.; and Torstila, S.. “Entrepreneur Debt Aversion and Financing Decisions: Evidence from COVID-19 Support Programs.” Working Paper, University of St. Gallen (2020).Google Scholar
Petersen, M. A., and Rajan, R. G.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Pierri, N., and Timmer, Y.. “The Importance of Technology in Banking During a Crisis.” Journal of Monetary Economics, 128 (2022), 88–104.CrossRefGoogle Scholar
Ru, H.; Yang, E.; and Zou, K.. “Combating the COVID-19 Pandemic: The Role of the SARS Imprint.” Management Science, 67 (2021), 5606–5615.CrossRefGoogle Scholar
Spiegel, M., and Tookes, H.. “Business Restrictions and COVID-19 Fatalities.” Review of Financial Studies, 34 (2021), 5266–5308.CrossRefGoogle Scholar
Tang, H. “Peer-to-Peer Lenders Versus Banks: Substitutes or Complements?” Review of Financial Studies, 32 (2019), 1900–1938.CrossRefGoogle Scholar
The Economist . “How the Digital Surge Will Reshape Finance.” The Economist, Oct. 8, 2020 (2020).Google Scholar
Weill, J. A.; Stigler, M.; Deschenes, O.; and Springborn, M. R.. “Social Distancing Responses to COVID-19 Emergency Declarations Strongly Differentiated by Income.” Proceedings of the National Academy of Sciences, 117 (2020), 19,658–19,660.CrossRefGoogle ScholarPubMed
Supplementary material: PDF

Kwan et al. supplementary material

Kwan et al. supplementary material

Download Kwan et al. supplementary material(PDF)
PDF 240.3 KB