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Checking Accounts and Bank Monitoring

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

Do checking accounts help banks monitor borrowers? A borrower’s checking account provides a bank with exclusive access to a continuous stream of borrower data, namely, the borrower’s checking account balances at the bank. 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 checking account information helps the bank to monitor commercial borrowers. We show the direct mechanism through which banks can use this information in monitoring. Our results provide empirical support for the notion of Black (Jrl of Fin Econ, 1975) and Fama (Jrl of Mon Econ, 1985) that, because of their role in the payments system, banks are “special” monitors.

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 99-02.

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Date of creation: Jul 2002
Date of revision:
Handle: RePEc:wop:pennin:99-02
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  1. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
  2. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  3. Mitchell Berlin & Loretta J. Mester, 1997. "On the Profitability and Cost of Relationship Lending," Center for Financial Institutions Working Papers 97-43, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  5. Preece, Dianna & Mullineaux, Donald J., 1996. "Monitoring, loan renegotiability, and firm value: The role of lending syndicates," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 577-593, April.
  6. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
  8. Leonard I. Nakamura, 1993. "Recent research in commercial banking: information and lending," Working Papers 93-24, Federal Reserve Bank of Philadelphia.
  9. Mitchell Berlin & Loretta J. Mester, 1998. "Deposits and relationship lending," Working Papers 98-22, Federal Reserve Bank of Philadelphia.
  10. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  11. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
  12. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  13. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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