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Transactions accounts and loan monitoring

Author

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  • 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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    More about this item

    Keywords

    Bank loans; Small business;

    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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