Prior research has shown, and this paper confirms, that when the market becomes aware a line of credit is granted, the borrower’s stock has a positive and significant reaction. The borrower’s reaction is used to identify the exact date the market becomes aware of the granting of the line of credit. This date is used as a one day window to investigate whether the bank’s stock also reacts. This reaction will be most obvious with large lines of credit. All lines of credit, larger than US$1 billion, granted during the years 1993–1996 are investigated. The results show, as predicted, a positive and significant reaction by the bank’s stock.

Both debt covenants and federal monitoring restrict banks’ discretion. We examine whether banks substituted monitoring for covenants by investigating debt issues of 105 banks between 1979 and 1984, a period when monitoring increased. We hypothesize that bank shareholders take advantage of the intersection between debt covenants and regulatory monitoring to reduce agency costs. We find a decrease in the number of debt issues containing such covenants and the total debt subject to such covenants. We find no such decrease during the same period for a sample of non-banking firms, or for banks during a subsequent period.