Introduction: Banks and Investment in IT

By its very nature, activity in the banking industry consists to a considerable extent in the handling of information. It is hardly surprising, then, that investments by banks in technologies related to the handling of information (hereafter referred to as information technology or IT) are substantial — higher, indeed, than those of any other sector in the economy. The measurement of the performance of such investments, however, is extremely problematic. What is more, the measurements that have been taken so far in respect of the banking industry have proven negative. In fact, the relating small number of US empirical studies conducted to date have identified a negative relationship between bank’s investment in IT and productivity. This phenomenon is known as the productivity paradox. The finding appears surprising for two reasons. In the first place, investments in IT show a positive performance in a large number of the other industries of the economy. Secondly, no other industry invests as much in IT as do the banks. The counterintuitive evidence of the productivity paradox in the US banking industry — high levels of IT investment resulting in a negative performance — constitutes the underlying reason for pursuing the central objective of this book: an investigation into the complex relationship between performance and IT investment in European banking.