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RFS Advance Access originally published online on July 1, 2006
Review of Financial Studies 2007 20(3):529-556; doi:10.1093/rfs/hhl018
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Transactions Accounts and Loan Monitoring

Loretta J. Mester
Federal Reserve Bank of Philadelphia and The Wharton School, University of Pennsylvania

Leonard I. Nakamura
Federal Reserve Bank of Philadelphia

Micheline Renault
Université du Québec à Montréal

Address correspondence to Leonard Nakamura, Research Department, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574, or e-mail: leonard.nakamura{at}phil.frb.org.

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)


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