In Search of A Rational Foundation For The Massive It Boom In The Australian Banking Industry: Can The It Boom Really Drive Relationship Banking?

International Review of Financial Analysis, Forthcoming https://doi.org/10.1016/j.irfa.2022.102148.

Posted: 10 May 2022 Last revised: 15 Aug 2022

See all articles by Partha Gangopadhyay

Partha Gangopadhyay

University of Western Sydney

Siddharth Jain

Western Sydney University

Walid Bakry

Western Sydney University

Date Written: April 13, 2022

Abstract

Information technology (IT) is meant to improve bank performance by lowering operational costs and improving the process of financial intermediation of banks. However, the empirical evidence has failed to reach a consensus on the precise effects of IT on bank performance as some find evidence to concur with the Solow Paradox, while others contradict this paradox. The heterogeneity in the quality of banking services is partly responsible for the inconsistency in the findings. To sidestep the issue of heterogeneity, we consider the top-tier Australian banks for which the quality of banking services is homogeneous. Applying the dynamic panel data methodology, i.e., panel autoregressive distributed lag (panel ARDL) and cross-sectionally augmented panel ARDL (CS-ARDL) models, we investigate the effect of IT on the cost and profit efficiency frontiers of the top-tier Australian banks during 2000-2019. We unequivocally establish that the frontiers of bank profits rise due to the adoption and diffusion of IT investment, contradicting the assumed failure of IT to adequately collect soft information in the banking industry. Furthermore, we find that the cost frontiers have risen, driven by the IT boom. Hence, there is evidence that despite increases in operational inefficiency, IT has shifted the profit frontiers up by enhancing relationship banking in Australia.

Keywords: Information technology, transactional banking, relationship banking, profit and cost frontiers, panel ARDL, CS-ARDL, Solow Paradox

JEL Classification: G21, G41, O14

Suggested Citation

Gangopadhyay, Partha and Jain, Siddharth and Bakry, Walid, In Search of A Rational Foundation For The Massive It Boom In The Australian Banking Industry: Can The It Boom Really Drive Relationship Banking? (April 13, 2022). International Review of Financial Analysis, Forthcoming https://doi.org/10.1016/j.irfa.2022.102148., Available at SSRN: https://ssrn.com/abstract=4083151

Partha Gangopadhyay

University of Western Sydney ( email )

PO Box 10
Kingswood, NSW 2747
Australia

Siddharth Jain

Western Sydney University ( email )

PO Box 10
Kingswood, NSW 2747
Australia

Walid Bakry (Contact Author)

Western Sydney University ( email )

Sydney
1 Parramatta Square, 169 Macquarie Street, Parrama
Sydney, 2751
Australia
2 9685 9372 (Phone)

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