The Effect of Bank Monitoring on Loan Repayment

63 Pages Posted: 18 May 2020

See all articles by Nicola Branzoli

Nicola Branzoli

Bank of Italy

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: May 2020

Abstract

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

Branzoli, Nicola and Fringuellotti, Fulvia, The Effect of Bank Monitoring on Loan Repayment (May 2020). FRB of New York Staff Report No. 923, Available at SSRN: https://ssrn.com/abstract=3601944 or http://dx.doi.org/10.2139/ssrn.3601944

Nicola Branzoli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Fulvia Fringuellotti (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
New York, NY 10045
United States

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