Culture, Geography and Institutions: Empirical Evidence from Small-scale Banking

In this article, I explore one of the channels through which culture may directly affect economic activities. I find evidence that common cultural heritage has a statistically and economically significant effect on cross‐border bank loans (even after geographical closeness and institutional convergence have been taken into account) flowing from Austria's local and regional banks to clients residing in one of the neighbouring Eastern European EU member states. To compile formal statistical evidence that common culture plays a role in cross‐border bank lending, I developed a new instrument of cultural distance that measures Austria's cultural proximity to its neighbouring Eastern European countries.