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Financial protectionism: the first tests

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  • Rose, Andrew

    ()
    (Monetary Policy Committee Unit, Bank of England)

  • Wieladek, Tomasz

    ()
    (Monetary Policy Committee Unit, Bank of England)

Abstract

We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks' lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997 Q3 and 2010 Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the 'loan mix', domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interset rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the United Kingdom by around 11 precentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effect interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not.

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Bibliographic Info

Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 32.

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Length: 30 pages
Date of creation: 01 May 2011
Date of revision:
Handle: RePEc:mpc:wpaper:0032

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Keywords: Bank; nationalisation; privatisation; crisis; loan; domestic; foreign; empirical; panel;

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  1. Andrew K. Rose & Mark M. Spiegel, 2002. "A gravity model of sovereign lending: trade, default and credit," Working Paper Series 2002-09, Federal Reserve Bank of San Francisco.
  2. Sevestre, Patrick & Martinez-Pages, Jorge & Gambacorta, Leonardo & Ehrmann, Michael & Worms, Andreas, 2001. "Financial systems and the role of banks in monetary policy transmission in the euro area," Discussion Paper Series 1: Economic Studies 2001,18, Deutsche Bundesbank, Research Centre.
  3. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
  4. Aiyar, Shekhar, 2011. "How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom," Bank of England working papers 424, Bank of England.
  5. Yacine Aït-Sahalia & Jochen Andritzky & Andreas Jobst & Sylwia Nowak & Natalia Tamirisa, 2010. "Market Response to Policy Initiatives during the Global Financial Crisis," NBER Working Papers 15809, National Bureau of Economic Research, Inc.
  6. Buch, Claudia M, 2003. " Information or Regulation: What Drives the International Activities of Commercial Banks?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 851-69, December.
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