Disentangling the Effect of Trust on Bank Lending

Abstract

This paper examines the effect of trust on bank lending using a sample of commercial banks in 34 countries around the world. We distinguish between two forms of trust: In-group trust, which we define as the trust in people we know, and Out-group trust, which we define as the trust in people we meet for the first time. We find that that Out-group trust significantly boosts bank lending. A closer look shows that this effect only holds in countries with relatively lower levels of institutional and judicial development. As for In-group trust, we find that it affects bank lending indirectly by favoring the development of informal lending. Overall, this paper provides novel evidence on the importance of trust and the mechanisms by which it influences bank lending around the world.

Keywords: Bank Lending, Trust, Institutional Development

JEL Classification: G21, G28, G32