War´s Ripple Effect: Regional Banking Dynamics in Times of Conflict - Insights from Ukraine

This paper examines the impact of the full-scale Russian invasion on regional banking activity in Ukraine, focusing on differences across regions directly affected by military operations, neighboring areas, and non-occupied regions. Using a dynamic difference-in-differences approach with multiple treatments, we find that war-induced disruptions extend beyond directly occupied regions, significantly influencing lending and deposit behavior also in regions neighboring the frontline. Lending in long-term occupied regions experienced the most severe decline, while short-term occupied areas and Kyiv also saw substantial reductions over time. Notably, the lending contraction in the regions neighboring occupied areas followed a pattern similar to that in the temporarily occupied regions, highlighting significant spillover effects. The shift toward short-term lending intensified in all affected regions, reflecting heightened financial uncertainty. The war also led to a widening of interest rate spreads, particularly in Kyiv and shortterm occupied areas, signaling elevated credit risk. Although deposits grew, lending remained limited after liberation, highlighting ongoing economic stagnation and constraint created by the partial dollarisation of the economy. These findings have crucial implications for post-war recovery policies, emphasizing the need for targeted financial support that should be extended beyond the regions directly involved in a war.