Organizational monitoring costs and credit contracts standardization

We empirically examine the relationship between monitoring costs within a banking organization and the standardization of credit terms in small businesses lending. We find that when senior bank managers are farther from a branch, making monitoring of branch activities more difficult, loan officers at the branch exercise less discretion and standardize contract terms more. The relationship is stronger in less competitive credit markets. Our results highlight the possible role of internal monitoring costs for lending practices and point to interactions between external market discipline and internal monitoring.