City Research Online

Abstract

Cultural trust biases (i.e., stereotypes) play an important role in shaping multinational banks’ cross-border exposures. Exploiting a unique identification strategy and combining European regulatory data on banks’ sovereign debt portfolios with existing and new surveys across 30 European countries, we show that multinational banks are more likely to lend to the government of a country when the residents of the countries where they operate exhibit more trust in the residents of that country. This result is robust to saturating our models with time-varying fixed effects at bank and country-pair levels, controlling for financial, informational, political and cultural linkages, and instrumenting trust via genetic and somatic similarities. Bank-level trust similarly drives corporate lending across borders and tilts banks’ sovereign portfolios towards long-term maturities. Its role is amplified when governments are hit by salience shocks such as Eurozone crises and the Brexit referendum. As potential transmission channels of stereotypes from foreign bank branches to headquarters, we provide evidence consistent with culturally biased communication and internal transfers of human capital.

Publication Type:	Article
Additional Information:	This is an open access article distributed under the terms of the Creative Commons CC BY license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords:	cultural biases; stereotypes; trust; banks; sovereign debt
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HG Finance H Social Sciences > HN Social history and conditions. Social problems. Social reform J Political Science > JZ International relations
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Department of Economics
SWORD Depositor:	Symplectic Administrator

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