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Geopolitical risk and cross-border bank lending

Author

Listed:
  • Dennis Reinhardt

    (Bank of England)

  • Julian Reynolds

    (Bank of England)

  • Rhiannon Sowerbutts

    (Bank of England)

Abstract

How does geopolitical risk affect cross-border bank lending? To examine this question, we exploit a rich cross-border bank lending data set from the UK which records banks' large exposures to individual firms and match this with a firm-level measure of geopolitical risk, derived from firms' earnings call reports. Combining granular firm-level data points with tight fixed effect specifications, we find that a one standard deviation increase in geopolitical risk causes cross-border bank lending to decline by around 4% after one year. This effect is not uniform: lending to financial sector firms declines most, while energy and defence sectors show no significant impact; also better-capitalised banks are less sensitive to borrower risk. Effects vary with geopolitical alignment between bank and firm nationalities and are more significant for sanctions-related risk. Finally, local projections show that geopolitical risk transmits to cross-border lending via macroeconomic aggregates and asset prices, with transmission influenced by credit growth dynamics and sanctions as the primary risk driver.

Suggested Citation

  • Dennis Reinhardt & Julian Reynolds & Rhiannon Sowerbutts, 2025. "Geopolitical risk and cross-border bank lending," Bank of England Staff Working Paper series 1164, Bank of England.
    • Handle: RePEc:boe:boeewp:023286
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/geopolitical-risk-and-cross-border-bank-lending.pdf
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    Keywords

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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