The Bank of England published Staff Working Paper No. 1,164 examining how firm-level geopolitical risk affects cross-border bank lending. Using UK supervisory “large exposures” data matched to a geopolitical risk measure derived from firms’ earnings calls, the authors estimate that a one standard deviation increase in geopolitical risk leads cross-border bank lending to fall by around 4% after one year. The effects are heterogeneous, with the largest lending cuts to financial-sector firms and no significant impact for energy and defence sectors. Better-capitalised banks are less sensitive to borrower geopolitical risk, and lending responses vary with geopolitical alignment between bank and firm nationalities, with stronger effects for sanctions-related risk. Local-projection results link the transmission to macroeconomic aggregates and asset prices, with credit growth dynamics influencing the strength of the channel. As a Staff Working Paper, the analysis is research in progress published to elicit comments and does not represent Bank of England policy.
Bank of England working paper finds geopolitical risk reduces cross-border bank lending by about 4% after one year
The Bank of England's Staff Working Paper No. 1,164 examines firm-level geopolitical risk's impact on cross-border bank lending, showing a 4% decline following a one standard deviation risk increase. Significant lending reductions occur to financial-sector firms, with better-capitalised banks less sensitive to geopolitical risk. The study highlights varying lending responses based on geopolitical alignment and sanctions-related risk, linking these dynamics to macroeconomic aggregates and asset prices.