Journal Article

Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers

Lars Norden and Martin Weber

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 23, issue 10, pages 3665-3699
Published in print October 2010 | ISSN: 0893-9454
Published online August 2010 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhq061
Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers

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  • Household Behaviour and Family Economics
  • Information, Knowledge, and Uncertainy
  • Financial Institutions and Services
  • Banking
  • Corporate Governance

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Information on borrower quality is a fundamental issue in debt contracting, corporate and consumer finance, and financial intermediation. We investigate the link between account activity and information production on borrower risk. Based on a unique data set, we find that credit line usage, limit violations, and cash inflows exhibit abnormal patterns approximately 12 months before default events. Measures of account activity substantially improve default predictions and are especially helpful for monitoring small businesses and individuals. Furthermore, early warning indications result in higher loan spreads, and in a higher likelihood of limit reductions and complete write-offs. Our study shows that account activity provides a real-time window into the borrower's cash flows, thus explaining why banks have an advantage in providing certain types of debt financing.

Keywords: D12; D82; G20; G21; G30

Journal Article.  14969 words.  Illustrated.

Subjects: Household Behaviour and Family Economics ; Information, Knowledge, and Uncertainy ; Financial Institutions and Services ; Banking ; Corporate Governance

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