Trust and the Cost of Bank Loans: International Evidence

Abstract

This paper analyses the effect of trust on bank loan spreads for a sample of 16,324 loans from 36 countries over the period 2003-2013, considering not just the role of trust but also the interaction between trust and the legal protection of property rights and how its effect is moderated by the economic development of the country. The results show that greater trust tend to reduce the bank loan spreads when the degree of the protection of property rights is weak in line with trust and legal protection being alternative mechanisms for reducing the cost of debt. Regarding with the degree of economic development, the results show that both trust and legal protection have a greater influence in countries with a lower degree of economic development.

Keywords: Trust, Loan Spread, Legal Enforcement

JEL Classification: G3