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When Sanctions Escalate but Exit Does Not: Strategic Adaptation by European Financial Institutions

Author

Listed:
  • Adrián Rojo

    (ESCP Business School, Alumnus)

  • Hamed Ghiaie

    (ESCP Business School)

Abstract

This paper examines the strategic adjustment of European financial institutions under escalating EU sanctions. We show that tighter sanctions do not necessarily lead to sustained financial disengagement from targeted jurisdictions. We use an interactive fixed-effects framework to estimate institution-specific counterfactual trajectories. We find that institutions that have already internalized prior restrictions respond to progressively tighter sanctions through defensive adaptation. They gradually and heterogeneously reconfigure customer relationships, interbank activity, investment portfolios, and physical presence rather than disengage financially. These findings show that sanctions operate as dynamic adjustment processes rather than one-time regulatory shocks. Sanctions effectiveness therefore depends not only on sanctions intensity but also on institutional adaptation.

Suggested Citation

  • Adrián Rojo & Hamed Ghiaie, 2026. "When Sanctions Escalate but Exit Does Not: Strategic Adaptation by European Financial Institutions," Working Papers 2026.04, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2026.04
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    JEL classification:

    • F - International Economics
    • G - Financial Economics

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