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Checking Accounts and Bank Monitoring

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Listed:
  • 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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    1. Berlin, Mitchell & Mester, Loretta J., 1998. "On the profitability and cost of relationship lending," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 873-897, August.
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    5. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
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    7. Leonard I. Nakamura, 1993. "Recent research in commercial banking: information and lending," Working Papers 93-24, Federal Reserve Bank of Philadelphia.
    8. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
    9. 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.
    10. 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.
    11. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    12. 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.
    13. 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.
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