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Financial markets, even more than other markets, run on trust. This column uses hand-collected data on banks’ investments in European sovereign debt to show that trust importantly influences cross-border investment. Banks acquire a unique corporate culture by adopting and synthesising the cultures of their employees. As a result, when residents of the countries where a bank operates have a high level of trust in residents of another country, the bank is more likely to hold claims on that country. This is the first evidence of the role of trust, rooted in cultural stereotypes, in bank lending to governments.
