Stress Testing Banks' Digital Capabilities: Evidence from the COVID-19 Pandemic

Abstract

We study the relationship between banks' IT capabilities and their ability to serve customers during the demand shock for digital banking services generated by the COVID-19 pandemic. Amid mobility restrictions, banks with better IT experience larger reductions in physical branch visits and larger increases in website traffic, implying a larger shift to digital banking. They also exhibit shorter reaction times in mentioning COVID-19 on their websites. Banks with better IT originate more PPP loans, especially in areas with more severe COVID-19 outbreaks, higher levels of internet use, and higher bank competition. They also attract more deposits during the pandemic. Firms more exposed to COVID-19 are more likely to switch to higher-IT banks, while banks more exposed to it are more likely to upgrade their IT.