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Financial protectionism: the first tests

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  • Rose, Andrew

    (Monetary Policy Committee Unit, Bank of England)

  • Wieladek, Tomasz

    (Monetary Policy Committee Unit, Bank of England)

Abstract

We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks' lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997 Q3 and 2010 Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the 'loan mix', domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interset rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the United Kingdom by around 11 precentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effect interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not.

Suggested Citation

  • Rose, Andrew & Wieladek, Tomasz, 2011. "Financial protectionism: the first tests," Discussion Papers 32, Monetary Policy Committee Unit, Bank of England.
  • Handle: RePEc:mpc:wpaper:0032
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    References listed on IDEAS

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    1. Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
    2. Michael Ehrmann & Leonardo Gambacorta & Jorge Mart�nez-Pag�s & Patrick Sevestre & Andreas Worms, 2001. "Fynancial Systems and the Role of Banks in Monetary Policy Transmission in the Euro area," Temi di discussione (Economic working papers) 432, Bank of Italy, Economic Research and International Relations Area.
    3. Aiyar, Shekhar, 2011. "How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom," Bank of England working papers 424, Bank of England.
    4. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
    5. Buch, Claudia M, 2003. "Information or Regulation: What Drives the International Activities of Commercial Banks?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 851-869, December.
    6. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives during the Global Financial Crisis," IMF Working Papers 2009/204, International Monetary Fund.
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    More about this item

    Keywords

    Bank; nationalisation; privatisation; crisis; loan; domestic; foreign; empirical; panel;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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