Transaction Accounts and Loan Monitoring

Mester, Loretta J.; Nakamura, Leonard I.; Renault, Micheline

doi:10.2139/ssrn.606681

Cited by 41 publications

(26 citation statements)

References 21 publications

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“…Black (1975) and Fama (1985) argue that this may greatly help banks in their monitoring activity. Mester et al (2005) provide empirical evidence that transaction account information actually improves monitoring. We therefore compare the effects on the loan default rate of different types of entry characterized by different levels of information.…”

Section: Description Of the Variablesmentioning

confidence: 99%

Informational Barriers to Entry into Credit Markets*

2006

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Economic theory suggests that asymmetric information between incumbents and entrants can generate barriers to entry into credit markets. Incumbents have superior information about their own customers and the overall economic conditions of the local credit market. This implies that entrants are likely to experience higher loan default rates than the incumbents. We test these theoretical predictions using a unique database of 7,275 observations on 729 individual banks' lending in 95 Italian local markets. We find that informational asymmetries play a significant role in explaining entrants' loan default rates. The default rate is significantly higher for those banks that entered local markets without opening a branch, suggesting that having a branch on site may help to reduce the informational disadvantage. We also uncover a positive correlation between banks' loan default rates in individual local markets and the number of banks lending in that market. We argue that these informational barriers can help to explain why entry into many local credit markets by domestic and foreign banks was slow, even after substantial deregulation.

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Section: Description Of the Variablesmentioning

confidence: 99%

Informational Barriers to Entry into Credit Markets*

2006

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“…Demand deposits are provided exclusively by banks and represent a significant feature of banks' specialness. Supply-side arguments suggest that demand deposits and checking accounts provide banks with proprietary information that can be used for monitoring borrowers (Mester et al 2007;Norden and Weber 2010). Consequently, there are liquidity and informational synergies between deposit taking and lending.…”

Section: Discussionmentioning

confidence: 99%

“…For example, there is evidence from the U.S. that core deposits, i.e., deposits with inelastic interest rates, represent an important basis for relationship lending (Berlin and Mester 1999). Alternative explanations for the coexistence of lending and deposit taking are based on information or liquidity synergies (e.g., Black 1975;Fama 1985;Kashyap et al 2002;Mester et al 2007;Norden and Weber 2010). Other recent research examines the role of funding strategies on bank risk and return (e.g., Demirgüç-Kunt and Huizinga 2009;Huang and Ratnovski 2009).…”

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confidence: 99%

Funding Modes of German Banks: Structural Changes and their Implications

Nordén

Weber

2010

J Financ Serv Res

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“…Mester, Nakamura, and Renault (2007) report that finance companies were responsible for an increasing share of loans to businesses over time, reaching one-third by 2006.…”

Section: Review Of the Literature On Small Business Lending By Communmentioning

confidence: 99%

Is Bigger Necessarily Better in Community Banking?

Hughes¹,

Jagtiani²,

Mester

2016

Working Paper (Federal Reserve Bank of Cleveland)

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ABSTRACTWe investigate the relative performance of publicly traded community banks (those with assets less than $10 billion) versus larger banks (those with assets between $10 billion and $50 billion). A body of research has shown that community banks have potential advantages in relationship lending compared with large banks, although newer research suggests that these advantages may be shrinking. In addition, the burdens placed on community banks by the regulatory reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the need to increase investment in technology, both of which have fixed-cost components, may have disproportionately raised community banks' costs. We find that, on average, large banks financially outperform community banks as a group and are more efficient at credit-risk assessment and monitoring. But within the community bank segment, larger community banks outperform smaller community banks. Our findings, taken as a whole, suggest that there are incentives for small banks to grow larger to exploit scale economies and to achieve other scale-related benefits in terms of credit-risk monitoring. In addition, we find that small business lending is an important factor in the better performance of large community banks compared with small community banks. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.

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Transaction Accounts and Loan Monitoring

Cited by 41 publications

References 21 publications

Informational Barriers to Entry into Credit Markets*

Informational Barriers to Entry into Credit Markets*

Funding Modes of German Banks: Structural Changes and their Implications

Is Bigger Necessarily Better in Community Banking?

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