Financial Protectionism: Further Evidence

Using data from large British and American banks, we provide three pieces of empirical evidence for financial protectionism. First, we examine whether a bank's preference for domestic, as opposed to external, lending changes when it is subjected to a large public intervention, such as bank nationalization; we also repeat our analysis for domestic and external funding. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and also increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than either private banks or nationalized banks from different countries. Third, we examine the impact of the Troubled Asset Relief Program (TARP) on the growth of American banks' domestic and foreign lending. Upon entry into the TARP, foreign, unlike domestic, lending declines significantly; however, this effect disappears upon TARP exit. These three pieces of evidence suggest that banks' behavior following large government interventions is consistent with financial protectionism.