The Determinants of Cross-Border Lending in the Euro Zone

We investigate the determinants of cross-border lending in the euro zone with a focus on the potentially limiting role of cultural and political factors. Employing a unique data set of European cross-border loans, the study uses various specifications of gravity models, which are subsequently augmented by societal proxies. Although trade-theoretic and financial development reasoning can explain part of the surge in cross-border lending, we demonstrate that distance and borders still matter. Moreover, we identify cultural differences and different legal family origin as important barriers to further integration in the euro zone.