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Transactions accounts and loan monitoring

Author

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

Abstract

We provide evidence that transactions accounts help financial intermediaries monitor borrowers by offering lenders a continuous stream of data on borrowers? account balances. This information is most readily available to commercial banks, but other intermediaries, such as finance companies, also have access to such information at a cost. Using a unique set of data that includes monthly and annual information on small-business borrowers at an anonymous Canadian bank, we provide empirical evidence that transactions account information helps the bank to monitor commercial borrowers? operating loans and we show the direct mechanism through which an intermediary can use this information in monitoring and controlling moral hazard problems associated with a rising probability of bankruptcy.

Suggested Citation

  • Loretta J. Mester & Leonard I. Nakamura & Micheline Renault, 2004. "Transactions accounts and loan monitoring," Working Papers 04-20, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:04-20
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    References listed on IDEAS

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    More about this item

    Keywords

    Loans;

    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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