Banks from one region lend significantly more to small businesses and homebuyers in another when the two regions are socially connected. This has important implications for borrowers, banks, and local economic development, finds new research from Mannheim Business School.

Prof Simon Rother from Mannheim Business School and Prof Oliver Rehbein from Vienna University of Economics and Business studied how social connectedness between residents of different counties in the US influences bank lending.

Social connectedness is defined as the likelihood that individuals in two counties know each other. This is measured using the Social Connectedness Index, based on Facebook friendship links, which closely mirror real-world social connectedness between county pairs. The researchers analysed data on loan allocation, terms, performance, and regional economic outcomes.

They find that banks lend more when social ties are stronger, particularly in traditional lending, where human involvement and soft information still matter. The effect disappears in fintech lending.

Loans to socially connected regions also come with more borrower-friendly terms. At the same time, banks differentiate more sharply between borrowers when social connectedness is high, which means some applicants may face stricter conditions.

While loan and bank performance improve with social connectedness, the implications go beyond banks. Improved lending to socially connected regions results in stronger GDP growth and job creation. Soft information – qualitative insights from social connections – appears to flow along social ties, possibly even in the absence of direct contact between bankers and borrowers.

“Economic and geographic factors such as commuting, physical distance, and cultural dissimilarity explain parts of the relationship between lending and social connectedness,” says Prof Rother. “But social ties help explain aspects of the geography of lending that remain otherwise unexplained, shedding new light on regional economic disparities.”