Integrating with their Feet: Cross-Border Lending at the German-Austrian Border

The financial integration in Europe concentrates on cross-border mergers rather than cross-border lending and emphasizes the need for harmonizing bank regulation and supervision. We study the impact of cross-border lending in a theoretical model where banks acquire either hard or soft information of borrowing firms. We test the model’s predictions using the ifo business climate survey that reports the perceptions of German firms’ credit availability between 2003 and 2006. Our results show that distance matters for cross-border lending, especially for the SMEs. In contrast to the policy of harmonization, differences in bank regulations may have speeded up the cross-border lending.