Trade in services under regulatory barriers: evidence from UK banking

Barriers to trade in services remain poorly understood. This paper investigates how regulatory barriers affect cross-border lending and deposit-taking by banks. Using confidential bank-level data from the Bank of England, we find that UK-resident banks substantially reduced lending to and deposit-taking from European Economic Area (EEA) countries after Brexit, with some effects observed after the referendum itself. Banks that lost the ability to provide services across the EEA without additional authorisation reduced their stocks of loans to and deposits from EEA countries by about 45% more than banks that did not have such authorisation when UK was a part of EU, relative to their activities with non-EEA countries. Moreover, banks with higher pre-referendum exposure to the EEA had lower lending and deposit-taking with the EEA after the referendum. We find limited evidence of multinational banks successfully circumventing the new barriers by using foreign affiliates. These results demonstrate the critical role of regulatory access in shaping the pattern of banking across borders and trade in services.