Functional distance and US global banks’ foreign branch lending

This paper examines the significance of functional distance in explaining the lending behavior of foreign branches of global banks. We operationalize functional distance, or the distance between the global bank's headquarters and the host country of the foreign branch, along a geographic, linguistic, and cultural dimension. Analyzing the lending activities of US global banks' foreign branches in 38 countries from 2001 to 2020, we find that geographic and linguistic functional distance has an adverse effect on local lending. We further find that a host country's institutional quality can moderate the effect of functional distance on local lending.