Geopolitical risk and cross-border bank lending | 국외연구자료

KDI 경제교육·정보센터

Economic Information and Education Center

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Geopolitical risk and cross-border bank lending

Bank of England

2025.12.29

How does geopolitical risk affect cross-border bank lending? To examine this question, we exploit a rich cross-border bank lending data set from the UK which records banks‘ large exposures to individual firms and match this with a firm-level measure of geopolitical risk, derived from firms‘ earnings call reports. Combining granular firm-level data points with tight fixed effect specifications, we find that a one standard deviation increase in geopolitical risk causes cross-border bank lending to decline by around 4% after one year. This effect is not uniform: lending to financial sector firms declines most, while energy and defence sectors show no significant impact; also better-capitalised banks are less sensitive to borrower risk. Effects vary with geopolitical alignment between bank and firm nationalities and are more significant for sanctions-related risk. Finally, local projections show that geopolitical risk transmits to cross-border lending via macroeconomic aggregates and asset prices, with transmission influenced by credit growth dynamics and sanctions as the primary risk driver.

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