The Effect of Bank Monitoring on Loan

We investigate the effect of bank monitoring on loan repayment. Using granular loan-level information from the Italian Credit Register, we build a novel measure of bank monitoring, which is based on bank requests for information on their existing borrowers. We perform a causal analysis, exploiting the Italy Regional Production Tax, IRAP, as a source of exogenus variation in bank monitoring. Our approach is supported by a theoretical model predicting that a decrease in the tax rate improves bank incentives to monitor borrowers. We find that an increase in the number of requests for information, as driven by a 1 percentage point decrease in the IRAP tax rate, reduces the probability of loan distress by 4 percentage points two quarters ahead.