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Transactions Accounts and Loan Monitoring

Author

Listed:
  • Loretta J. Mester
  • Leonard I. Nakamura
  • Micheline Renault

Abstract

We show that transactions accounts, by providing ongoing data on borrowers’ activities, help financial intermediaries monitor borrowers. This information is most readily available to commercial banks, which offer these accounts and lending together. We find that (1) monthly changes in accounts receivable are reflected in transactions accounts; (2) borrowings in excess of collateral predict credit downgrades and loan write-downs; and (3) the lender intensifies monitoring in response. This is evidence on a key issue in financial intermediation—there is an advantage to providing deposit-taking and lending jointly. But this advantage may have fallen as the cost of communication has declined.

Suggested Citation

  • Loretta J. Mester & Leonard I. Nakamura & Micheline Renault, 2007. "Transactions Accounts and Loan Monitoring," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 529-556.
    • Handle: RePEc:oup:rfinst:v:20:y:2007:i:3:p:529-556.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhl018
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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