Information and communication technology in the Brazilian banking industry: does functionality matter?

Abstract

A banking system is functional when it expands the potential to provide more liquidity to the economy, especially for development finance. The advances of Information and Communication Technology (ICT) can contribute to increasing banks’ potential to offer more products and services, expanding their capacity to be more functional. Diversifying financial instruments can encourage them to operate with more profitable operations in the short term to the detriment of the supply of credit in the long term, decreasing their ability to be more functional. This article aims to analyze the relationship between ICT and the functionality of Brazilian banks between 1995 and 2016. We created an index of functionality. The Panel Data estimation verified an ambiguous impact of ICT on banks’ functionality. The use of electronic devices and services for software-driven data processing and transmission has had a positive effect on this index. However, the influence of ICT on functionality was to enhance the negative effects of financial innovations on the supply of credit by banks because of the agents” incentives to invest in short-term and more liquid assets, vis à vis of financing long-term investments, harming the capacity for financing Brazilian development.