Checking accounts and bank monitoring

Loretta Mester, Leonard Nakamura and Micheline Renault

No 01-3, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Superseded by the paper \"Transactions accounts and loan monitoring\" (Working Paper 05-14) ; Do checking accounts help banks monitor borrowers? If they do, the rationale both for allowing regulated providers of liquidity to also make risky loans to commercial borrowers and for the government's providing deposit insurance becomes clearer. Using a unique set of data that includes monthly and annual information on small-business borrowers at an anonymous Canadian bank, we provide evidence that a bank has exclusive access to a continuous stream of borrower data that helps it to monitor the borrower, namely, the firm's checking account balances at the bank. In this paper, which to our knowledge is the first direct empirical test of the usefulness of checking account information in monitoring commercial borrowers, we provide \"smoking gun\" evidence that banks are special. We also provide detailed evidence of how a commercial bank uses this information to determine its credit ratings of borrowers and adjust the intensity of its monitoring activity.

Keywords: Checking accounts; Bank loans (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-cba
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Working Paper: Checking accounts and bank monitoring (1998)
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