Cultural similarity and bank interconnectedness

Abstract

We analyze the impact of cultural similarity on bank interconnectedness across sixty major developed and developing countries. The bank interconnectedness is measured using both correlation and physical networks. We use bank-level culture based on directors’ nationalities and calculate their pair-wise cultural similarities with other banks. We find cultural similarity increases both return synchronicity (correlation network) and interbank lending (physical network). Our results suggest that cultural similarity could be an important contributor to the potential contagion risk arising from high bank interconnectedness. We also investigate the influence of bank interconnectedness on risk-taking and find evidence that is consistent with the theoretical framework of Altinoglu and Stiglitz (2023) who propose that both reinforce each other.