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The Effect of Bank Monitoring on Loan Repayment
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 ...
Report
Credit, Income and Inequality
Analyzing unique data on loan applications by individuals who are majority owners of small firms, we detail how a bank’s credit decisions affect their future income. We use the bank’s cutoff rule, which is based on the applicants’ credit scores, as the discontinuous locus providing exogenous variation in the decision to grant loans. We show that application acceptance increases recipients’ income five years later by more than 10 percent compared to denied applicants. This effect is mostly driven by the use of borrowed funds to undertake investments, and is stronger when individuals ...