The Effect of Bank Monitoring on Loan Repayment
78 Pages Posted: 18 May 2020 Last revised: 24 Feb 2022
Date Written: February 21, 2022
Monitoring is one of the main activities explaining the existence of banks, yet empirical evidence about its effect on loan outcomes is scant. Using granular loan-level information from the Italian Credit Register, we build a novel measure of bank monitoring based on banks’ requests for information on their existing borrowers and we investigate the effect of bank monitoring on loan repayment. We perform a causal analysis exploiting changes in the regional corporate tax rate as a source of exogenous variation in bank monitoring. Our identification strategy is supported by a theoretical model predicting that a decrease in the tax rate improves bank incentives to monitor borrowers by increasing returns from lending. We find that bank monitoring reduces the probability of a delinquency in a substantial way and that the effect is stronger for the types of loans that benefit most from bank oversight, such as term loans.
Keywords: bank monitoring, nonperforming loan, tax policy
JEL Classification: G21, G32, H25, H32
Suggested Citation: Suggested Citation