Germany Web: www.cesifo.de Integrated with Their Feet: Cross-Border Lending at the German-Austrian Border*

(Preliminary version) Integration of banking markets can happen through either cross-border lending or cross-border mergers. In the policy debate in Europe, more emphasize is put on cross-border mergers. We study the impact of cross-border lending on the financing conditions of firms at the German-Austrian border. We use the ifo business climate survey data, that reports the perception of German firms of the banks ’ willingness to lend for the period 2003 – 2006. Our results show that distance also matters in cross-border lending and that SMEs benefit most from cross-border lending. Somewhat paradoxically, difference in banking supervision may have speeded up cross-border lending