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Transactions accounts and loan monitoring

Author

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

Abstract

The authors 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, the authors find a significant relationship between loans becoming troubled and the number of prior borrowings in excess of collateral. Since the bank monitors the value of collateral (defined as accounts receivable plus inventory) at high frequency through the transactions account of the borrower, this unique access to useful information gives banks an advantage over other lenders. The authors also find that banks more intensively monitor loans that have a higher number of violations of the collateral limit. ; This paper substantially revises and supersedes the paper "Checking accounts and bank monitoring".

Suggested Citation

  • Loretta J. Mester & Leonard I. Nakamura, 2005. "Transactions accounts and loan monitoring," Working Papers 05-14, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:05-14
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    References listed on IDEAS

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    Cited by:

    1. Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2006. "Internal ratings systems, implied credit risk and the consistency of banks' risk classification policies," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1899-1926, July.
    2. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2010. "Benefits of relationship banking: evidence from consumer credit markets," Working Paper Series WP-2010-05, Federal Reserve Bank of Chicago.
    3. Bartholdy, Jan & Mateus, Cesário, 2006. "Debt and Taxes: Evidence from bank-financed unlisted firms," Finance Research Group Working Papers F-2006-02, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    4. Bartholdy, Jan & Mateus, Cesário, 2011. "Debt and taxes for private firms," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 177-189, June.
    5. Anthony Coleman & Neil Esho & Ian Sharpe, 2006. "Does Bank Monitoring Influence Loan Contract Terms?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(2), pages 177-198, October.
    6. Ahn, Sungyoon & Choi, Wooseok, 2009. "The role of bank monitoring in corporate governance: Evidence from borrowers' earnings management behavior," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 425-434, February.

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    Keywords

    Bank loans ; Small business;

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