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Too much of a good thing

Too much of a good thing

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Does investment in IT encourage complexity and risk-taking in banking, asks Ljubljana and Amsterdam University academic Matej Marinc.

This paper analyzes whether banks are special in comparison to other firms in the use of information technology (IT). IT spurs communication, digitisation of business processes and establishment of internet and mobile customer access channels. IT modifies core banking technologies and facilitates automatic loan processing, electronic payments, and clearing and settlement transactions.

Similar to the situation in other industries, IT increases complexity in banking by increasing product variety and conglomeration. However, pronounced asset-substitution problems may cause banks to become excessively complex in order to disguise risk-taking. Banks may abuse the additional flexibility that IT facilitates to shift risks at short notice or even become too big to fail.

Finally, developments in IT may lead to increased interconnectedness in banking with potentially adverse effects on systemic risk. Several examples from the 2007-2009 financial crisis are given.

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