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| Theoretically bank's loan monitoring activity hinges critically on its capitalisation. To proxy for monitoring intensity we use changes in borrowers' investment following loan covenant violations when creditors can intervene in the governance of the firm. Exploiting granular bank-firm relationships observed in the syndicated loan market we document substantial heterogeneity in monitoring across banks and through time. Better capitalised banks are more lenient monitors that intervene less with covenant violators. Importantly this hands-off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks. |
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