The Impact of Information Technology US Commercial Bank Lending: Implications for Small Businesses

Over the last three decades, advances in information technology have improved banks’ efficiency of credit scoring/rating. I infer that the technology of credit rating improves by 45% from 1990 to 2007. I evaluate the effects of this technological improvement on the US commercial banking market with a dynamic, quantitative model. In the model, banks have an economy of scale at utilizing new technology to evaluate borrowers’ hard information, but increasing marginal costs of acquiring soft information. The model shows that due to this technological improvement, large banks gain market shares, small banks exit, and risky, small businesses receive fewer loans. It also shows that to encourage lending to small businesses, we should reduce banks’ costs of acquiring soft information, but should not subsidize small banks.