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Checking Accounts and Bank Monitoring

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

Abstract

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.

Suggested Citation

  • Loretta J. Mester & Leonard I. Nakamura & Micheline Renault, 2002. "Checking Accounts and Bank Monitoring," Center for Financial Institutions Working Papers 99-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:99-02
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    References listed on IDEAS

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