Checking Accounts and Bank Monitoring

FRB of Philadelphia Working Paper No. 01-3

39 Pages Posted: 1 May 2001

See all articles by Loretta J. Mester

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Micheline Renault

University of Quebec at Montreal

Date Written: March 2001

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, 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.

JEL Classification: G21, E50

Suggested Citation

Mester, Loretta J. and Nakamura, Leonard I. and Renault, Micheline, Checking Accounts and Bank Monitoring (March 2001). FRB of Philadelphia Working Paper No. 01-3, Available at SSRN: https://ssrn.com/abstract=267497 or http://dx.doi.org/10.2139/ssrn.267497

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Leonard I. Nakamura (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)

Micheline Renault

University of Quebec at Montreal ( email )

P.O. Box 8888, Downtown Station
Succursale Centre Ville
Montreal, Quebec H3C 3P8
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
454
Abstract Views
3,216
rank
71,606
PlumX Metrics