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Culture, geography, institutions and cross-border bank lending and risk taking

Owen, Ann L. and Temesvary, Judit (2014): Culture, geography, institutions and cross-border bank lending and risk taking.

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Abstract

We explore the relationship of culture, regulation, and geographical factors with bilateral cross-border bank lending. Using a newly compiled dataset on BIS-reporting banks’ activities, we find that geographical proximity, information flows and common institutional arrangements are the primary correlates 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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