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What determines cross-border bank lending and risk-taking? The effects of culture, geography, institutions, and information exchange

Owen, Ann L. and Temesvary, Judit (2014): What determines cross-border bank lending and risk-taking? The effects of culture, geography, institutions, and information exchange.

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Abstract

We explore the effects of culture, regulation, and geographical factors on bilateral cross-border bank lending. Using a newly compiled dataset on BIS-reporting banks’ activities, we find that geographical factors, information flows and common institutional arrangements are the primary drivers of bilateral bank lending. Trust between individuals in the two countries matters only as a proxy for other cultural similarities. The relationship between bank regulatory differences and lending flows has changed over time. Before the crisis, banks made more cross-border loans in countries with regulations that promoted market discipline and transparency, but took on more risk in countries that had less transparency, perhaps in pursuit of higher returns. This relationship between transparency and banking flows has disappeared in the aftermath of the financial crisis.

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