This paper analyzes when a borrower's debt contract is monitored by lenders, focusing on the choice between borrowing directly (issuing bonds without monitoring) and borrowing through a bank that monitors to mitigate moral hazard. It provides a theory of bank loan demand and the role of monitoring in situations where reputation effects are significant. A key finding is that borrowers with middle-of-the-spectrum credit ratings rely on bank loans, while higher-rated borrowers may choose to borrow directly when interest rates are high or future profitability is low. Lower-rated borrowers are less likely to benefit from monitoring, as it does not provide incentives to avoid risky behavior. The model explores how reputation affects borrowing decisions, with borrowers building a track record of repayment or default that influences future lending. Monitoring can serve two functions: providing incentives for borrowers to choose safe projects or screening out those who take risky actions. The effectiveness of monitoring depends on the borrower's credit rating and the likelihood of future profitability. The paper also examines how monitoring and reputation interact over time, showing that borrowers with good reputations can issue debt directly without monitoring, while those with poor reputations may need to rely on banks. The model highlights that monitoring is more valuable for borrowers with higher credit ratings, as they have more to lose from defaulting. It also shows that monitoring is less useful for lower-rated borrowers, as it does not provide significant incentives to avoid risky behavior. The analysis concludes that the demand for bank loans increases during periods of high interest rates or low future profitability, as higher-rated borrowers require monitoring to ensure safe lending. The paper also shows that monitoring can help reduce default rates and increase the quality of new loans, especially when moral hazard is widespread. Overall, the model provides a framework for understanding how reputation and monitoring influence borrowing decisions in financial markets.This paper analyzes when a borrower's debt contract is monitored by lenders, focusing on the choice between borrowing directly (issuing bonds without monitoring) and borrowing through a bank that monitors to mitigate moral hazard. It provides a theory of bank loan demand and the role of monitoring in situations where reputation effects are significant. A key finding is that borrowers with middle-of-the-spectrum credit ratings rely on bank loans, while higher-rated borrowers may choose to borrow directly when interest rates are high or future profitability is low. Lower-rated borrowers are less likely to benefit from monitoring, as it does not provide incentives to avoid risky behavior. The model explores how reputation affects borrowing decisions, with borrowers building a track record of repayment or default that influences future lending. Monitoring can serve two functions: providing incentives for borrowers to choose safe projects or screening out those who take risky actions. The effectiveness of monitoring depends on the borrower's credit rating and the likelihood of future profitability. The paper also examines how monitoring and reputation interact over time, showing that borrowers with good reputations can issue debt directly without monitoring, while those with poor reputations may need to rely on banks. The model highlights that monitoring is more valuable for borrowers with higher credit ratings, as they have more to lose from defaulting. It also shows that monitoring is less useful for lower-rated borrowers, as it does not provide significant incentives to avoid risky behavior. The analysis concludes that the demand for bank loans increases during periods of high interest rates or low future profitability, as higher-rated borrowers require monitoring to ensure safe lending. The paper also shows that monitoring can help reduce default rates and increase the quality of new loans, especially when moral hazard is widespread. Overall, the model provides a framework for understanding how reputation and monitoring influence borrowing decisions in financial markets.