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



We investigate whether credit line usage and checking account activity is useful for monitoring bank borrowers and if this information affects bank behavior. Analyzing a unique data set with more than 3 million account-month observations from the period 2002-2006, we provide evidence that credit line usage, the cumulative number of limit violations, the account amplitude and credit payments exhibit an abnormal pattern approximately 12 months before default events. The additional consideration of this information substantially improves the prediction of defaults. Differentiating by borrower type reveals that checking account information is particularly helpful for monitoring small businesses and individuals. Interestingly, we also show that early warning signals from credit line usage and account activity of firms result into higher spreads on subsequent new loans and a higher likelihood of limit reductions and account closes. Our findings suggest that access to this kind of private and hard information provides banks with a unique advantage relative to non-bank lenders and financial markets.
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Myra Lissenberg