Ethnicity and cross-border lending: evidence from the syndicated loan market.

Whilst the connection between culture and financial intermediation across countries has received considerable attention, there is scant work on the role of local ethnicity in bank lending operations. To fill this void, we lean on the sociology literature to scrutinize the impact of local ethnicity characteristics on syndicated loan composition and size in cross-border lending. We specifically examine whether local demographics in the U.S. for a specific bank impact their contracting in the international syndicated loan market. Exploiting Gravity Models, we find a higher likelihood of syndication and volume in cross-border loans when there is overlap in local and foreign market ethnicity. To alleviate endogeneity concerns between ethnicity and bank lending, we conduct robustness tests on different sub-samples. This analysis reports a significant uptick in cross-border loans for merging banks which share ethnicity in their neighbourhood (or zip). Moreover, these loans are associated with lower spreads than other matched cross-border loans, which can be explained by lower asymmetric information.