Bank Digitalization and Capital Reallocation

This study investigates the impact of bank digitalization on capital reallocation using the adoption of digital lending platforms and a difference-in-differences design. We find that digital transformation in banking facilitates the reallocation of capital from higher-risk to lower-risk sectors. This effect is particularly pronounced in regions with high levels of government influence and in city and rural commercial banks, which are more susceptible to government intervention. Our findings suggest that banks that implement digital platforms are better positioned to resist political pressures, as the data-driven, automated decision-making processes make it difficult to justify risky, politically motivated loans, while increased transparency limits local government influence over credit allocation. The effects of digitalization on capital reallocation are further amplified in banks with opaque information environments, weak internal control, and high credit risks. Additional analyses show that the adoption of digital lending platforms improves the timeliness of loan loss recognition, reduces bank risk, and enhances operating performance. This study contributes to the literature on digitalization by highlighting its role in improving capital allocation in the banking sector and offers insights into how technological advancements can mitigate the risks posed by political intervention and high-risk lending.