Trust and Arm's Length : Lessons from SME Financing

Studies on the influence of trust on credit activity focus mainly on its impact on credit contracts. However, research has highlighted that these are strongly related to the kind of lending technology used by the bank. How trust shapes a bank’s business model is an issue that has not yet been addressed. In this paper we bridge this gap. Using bank-specific indicators of trust built from ERBD surveys, we show that banks prefer to operate transactional (respectively relationship) lending business models in areas where generalized trust is high (low)