Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241116 
Year of Publication: 
2020
Series/Report no.: 
Staff Report No. 923
Publisher: 
Federal Reserve Bank of New York, New York, NY
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.
Subjects: 
bank monitoring
nonperforming loan
tax policy
JEL: 
G21
G32
H25
H32
Document Type: 
Working Paper

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