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Checking accounts and bank monitoring

Loretta Mester, Leonard Nakamura () and Micheline Renault

No 98-25, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: 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, the authors provide evidence that a bank has exclusive access to a continuous stream of borrower data, namely, the firm's checking account balances at the bank, that helps it to monitor the borrower. ; To the authors' knowledge, this paper is the first direct empirical test of the usefulness of checking account information in monitoring commercial borrowers. The authors directly examine the mechanism through which a bank is able to gain an information advantage over other types of lenders and find evidence that checking account information is indeed relatively transparent for monitoring borrowers' collateral and that such monitoring is useful in detecting problems with loans. As such, the authors' data provide "smoking gun" evidence that banks are special.

Keywords: Checking; accounts (search for similar items in EconPapers)
Date: 1998
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Working Paper: Checking Accounts and Bank Monitoring (2002) Downloads
Working Paper: Checking accounts and bank monitoring (2001)
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