Shock propaganda, asset quality and lending behaviour

In this paper, we employ the 2014 geopolitical conflict in Eastern Ukraine as a negative shock to banks' assets and examine its impacts on banking sector. We find that banks are hit by the conflict more severely if they granted more loans in the conflict areas as of 2014 Q1. Consequently, in the onset of the unrest, more exposed banks experience a sharper increase in troubled assets and a deeper reduction in credit supply compared to less affected counterparts. Additionally, the shock in the East can be transmitted to other markets through the interconnectedness among banks and branches but the spillover is mitigated by the market - conflict distance. Further analysis provides evidence for the "flight to headquarters" effect in credit allocation whereby more affected banks tend to cut lending more in the markets which are farther away from the headquarters.