From screening gains to automation risks: how IT investment shapes banks’ lending outcomes

We examine how banks’ IT investments shape the link between loan volume and credit risk. Using a panel of U.S. banks from 2007 to 2020, we document a nonlinear U-shaped relationship: credit quality initially improves as lending expands but deteriorates beyond a turning point. Importantly, higher IT investment steepens this curve and shifts the turning point to the right, indicating greater early-stage screening efficiency but accelerated risk accumulation during later-stage loan expansion. Our findings reveal that banks’ IT investment shapes the loan-credit risk relationship in a nonlinear, double-edged manner, providing new evidence of the trade-off between automation and risk control across the lending lifecycle.