Bank Loan Monitoring, Distance, and Delegation

Abstract

Using a proprietary transaction-level database of nearly 30,000 multiple-draw construction loans and their on-site inspection reports, we empirically examine the relationship between geographic distance and bank information acquisition over the course of the loans (i.e., monitoring). We find that projects farther from the nearest bank branch are more intensely monitored by bank-contracted, third-party inspectors (delegated monitors) and that projects farther from these inspectors receive less intense monitoring, potentially because inspectors face distance-related frictions. These results are consistent with the prediction that distance increases informational frictions but also suggest that banks may offset these frictions by delegating monitoring to closer inspectors.