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AbstractIn this article we investigate the determining factors of bank monitoring in small business lending. Unlike previous studies that rely on proxies of a bank's monitoring effort, we use a large and unique data set that includes the number of monitoring contacts per year between a European bank and a large number of small firms from 2009 to 2012. Our main results highlight that the frequency of a bank's monitoring effort is negatively related to the firm's reputation and the strength of the bank–firm relationship, and positively related to the bank–borrower proximity and the borrower's credit risk level.

AbstractWe analyze the determinants of soft information production on bank clients assuming that this information is collected through close contact with borrowers. After classifying contacts based on the initiator and the location of the lender–borrower meetings, we find that banks have more direct contact with firms characterized by low risk and low use of their banking products, indicating that there may also be commercial reasons for such contact. Our findings suggest that the production of soft information may follow a quality selection process in which banks prefer to strengthen relationships with clients characterized by low risk and low use of their products. We provide additional evidence of the role of soft information in ongoing interactions between banks and borrowers. Banks that initiate contacts at the firm location result in future lower risk, lower spreads, and increased product sales.