Transactions Accounts and Loan Monitoring

Abstract

We show that transactions accounts, by providing ongoing data on borrowers’ activities, help financial intermediaries monitor borrowers. This information is most readily available to commercial banks, which offer these accounts and lending together. We find that (1) monthly changes in accounts receivable are reflected in transactions accounts; (2) borrowings in excess of collateral predict credit downgrades and loan write-downs; and (3) the lender intensifies monitoring in response. This is evidence on a key issue in financial intermediation—there is an advantage to providing deposit-taking and lending jointly. But this advantage may have fallen as the cost of communication has declined. ( JEL G10, G20, G21)