MGT300-INTERNATIONAL ICT

International e-banking: ICT investments and the Basel Accord

by Hong-Jen Lin, Winston T. Lin

This study investigates how the Basel Accord and Information and Telecommunications Technologies (ICT) investments affect the commercial banking industries across countries. We employ the stochastic frontier approach to explore a data set composed of commercial banks, from 51 countries. We find that telecommunications investment reduces, and the Basel Accord proxy enhances, the cost efficiency of commercial banks under study. Moreover, it is found that ICT investments improve cost efficiencies of commercial banks for countries in which the regulations are consistent with the international supervision.
1. Introduction
During the past decade, commercial banks have witnessed dramatic change in information and telecommunications technologies (called ICT hereinafter). For instance, the use of electronic communication, such as electronic bill paying, home banking, and internet transaction, has been altering the relationship of business-to-business (B2B) and business-to-customer (B2C). The marketing accessibility of financial institutions is extended and increased to remote areas or countries via the new telecommunications technology. Hence, the role of ICT investments becomes more important in the banking industry. This trend is also called e-banking.
The impacts of ICT in banking are categorized into three categories: 1) globalization, 2) deregulation, and 3) consolidation (Nieto, 2001). First, commercial banks can outreach remote clients via electronic communications devices to the extent that foreign customers are able to process transactions across national borders. Thus, the banking markets are marching toward globalization. Second, accompanying globalization, deregulation in the banking industry prevails in many countries in order to improve the competitive strength of the financial industry of a nation. Third, new technologies also enlarge the capacities of financial institutions and thus improve their cost efficiency. Therefore, more and more commercial banks have merged together to attain a higher level of efficiency than before.