Data and code for: Bank Loan Monitoring, Distance and Delegation

A body of literature shows that lenders grant less credit to borrowers who are geographically farther away. This literature assumes that physical distance increases the costs for the lender to monitor borrowers, thereby increasing informational frictions. However, we are aware of no studies that directly test this assumption. We use a proprietary database of detailed loan-level data and on-site inspection reports for a bank’s portfolio of construction loans to examine the relationship between distance and monitoring activity. We find that construction projects farther from the nearest bank branch are more intensely monitored by third-party inspectors contracted by the bank. We also find that projects farther from these third-party inspectors are subject to less intense monitoring. These results are consistent with the prediction that distance increases the informational opacity of borrowers, but also suggest that banks can at least partially offset these frictions through the delegation of monitoring to closer inspectors.