Structural Change in the U.S. Banking Industry:
The Role of Information Technology
Sandra D. Cooke
Economics and Statistics Administration Office of Policy Development Office of Business and Industrial Analysis

June 1997
ESA/OPA 97-6

Structural Change in Banking: the Role of Information Technology

Structural Change in Banking: the Role of Information Technology

ABSTRACT
Commercial bank investment in information technology (IT) equipment has grown rapidly, from $104 million in 1960 to more than $10 billion in 1994. These investments in “hard” technologies (computer hardware, software, telecommunications equipment, etc.) have been accompanied by increases in "soft" technologies, for example, complex financial innovations that were infeasible on a large scale without IT hardware. These developments, together with deregulation, are creating new competitors, new financial markets and instruments, and a new role for commercial banks as providers of financial services. This study documents how changes in information technology have affected the role of banks in financial markets and have influenced changes in the structure and performance of the U.S. banking industry. The analysis also covers new, fast-growing financial innovations linked to IT investment e.g., asset securitization and derivatives. IT’s effect on the banking industry has been positive. Increased competition has caused banks to lose traditional customers, but IT enabled the banks to offer new products, expand into nontraditional areas, operate more efficiently, and minimize risk. The aggregate economy is better off because of a more efficient financial industry and because of the increased quality and value of banking services. IT has been central to the evolution of the market for securitized instruments. Mortgagebacked securities have experienced phenomenal growth over the past 25 years.