Why do banks behave seemingly at odds with financial theory when making credit decisions? This book starts out investigating what financial and legal theory would predict about decision making in commercial banks. Through field studies and cross-country quantitative analysis, it finds that the trust people have in each other and institutions around them matter more than the measurable qualities of firm, industry, economic context, or legal environment. The effects of political stability, corruption, history, administrative tradition, and modernity all provide new light on how credit is allocated, and the book devotes much attention to the effect of social capital on credit. Bank behavior is investigated through field studies in Peru and Argentina, and those observations are applied to global data to establish a wider applicability. The author discusses the importance of the findings by looking in detail at secured transactions reform, which could have a large impact on development. He concludes that such reforms are likely to have little impact if factors like trust in institutions and political stability are not addressed first.
