Transactions Accounts and Loan Monitoring

Abstract

We provide evidence that transactions accounts help financial intermediaries monitor borrowers by offering lenders a continuous stream of data on borrowers' account balances. This information is most readily available to commercial banks, but other intermediaries, such as finance companies, also have access to such information at a cost. Using a unique set of data that includes monthly and annual information on small-business borrowers at an anonymous Canadian bank, we find a significant relationship between loans becoming troubled and the number of prior borrowings in excess of collateral. Since the bank monitors the value of collateral (defined as accounts receivable plus inventory) at high frequency through the transactions account of the borrower, this unique access to useful information gives banks an advantage over other lenders. We also find that banks more intensively monitor loans that have a higher number of violations of the collateral limit.

Bank size, lending technologies, and small business finance

“…Most measures of relationship strength in the literature focus on length, as longer relationships allow more time for the lending bank to garner proprietary soft information about the firm (e.g., Petersen and Rajan, 1994;Berger and Udell, 1995). Some strength measures include breadth in the form of a checking account through which the bank may gain information from monitoring the firm's cash flows (e.g., Mester et al, 2007). Others focus on lender exclusivity, the accumulation of all of a firm's credits in a single bank, which may maximize the information advantage of that bank (e.g.…”

The role of bank monitoring in corporate governance: Evidence from borrowers’ earnings management behavior

“…In general, prior research shows that, while monitoring a borrower's deposit account, a bank may possess timely and exclusive access to the borrower's private information including information on the borrower's cash flows (Qi, 1998;Mester et al, 2005). Therefore, a bank's deposit service can be an effective way to see through a borrower's financial reporting behavior, thereby making the borrower's earnings management transparent to the bank lender.…”

Is there any dependence between consumer credit line utilization and default probability on a term loan? Evidence from bank-customer data

“…They show that banks tend to monitor clients' credit line utilization through information on the use of their checking accounts. Using a Canadian dataset, Mester, Nakamura and Renault (2007) also find that monitoring firms' transaction accounts may provide useful information on borrower credit quality. They show that banks intensify the transaction account monitoring activity when loans are perceived as deteriorating.…”