The strategic response of banks to an exogenous positive information shock in the credit markets

According to the contemporary banking theory, it is conceivable that the rapid advance of information technology has shifted the relative competitive status between the market- based and conventional intermediated finance. When trying to enter into the markets traditionally dominated by conventional banks, investment banks have faced an informational barrier to entry caused by the adverse selection effect. Better information technology reduces the signalling costs of direct finance, which lowers this informational barrier of direct finance. Improved information also lowers risk and liquidity premiums of market finance. This will further benefit the investment banks. The traditional incumbent bank could respond to this threat by sacrificing costs in order to improve its screening technology with the purpose of regaining its informational competitiveness end re-establishing the informational barrier. If this is done credibly it may deter the entry. – Banking ; information technology ; adverse selection ; signalling ; screening