Border conflict: Bank lending amid geopolitical tensions

Geopolitical risks—resulting from international conflicts, wars, and diplomatic and trade tensions—have recently reached historic highs. Major global events, such as Russia's invasion of Ukraine and escalating trade wars, have demonstrated that the effects of such tensions can extend far beyond the countries directly involved, disrupting financial markets worldwide. Understanding how geopolitical instability affects financial institutions is crucial, as banks play a crucial role in providing financing, supporting businesses, and maintaining economic stability.

The purpose of this study is to analyze how geopolitical tensions triggered by war influence bank lending decisions—specifically, how the effects of these tensions spread beyond national borders and how state-owned banks respond differently from private banks. The study focuses on two key questions: First, does increased geopolitical uncertainty caused by conflict lead to a reduction in lending to companies located near the conflict zone, even if these regions are not directly affected by hostilities? Second, how does the behavior of state-owned banks differ from private banks during armed conflicts and in the context of international sanctions?

To answer these questions, the study uses granular, single-dealer loan data from multiple countries spanning over three decades (1990–2023). The project employs causal inference methods, including Difference-in-Differences (DiD) approaches, which identify the spillover effects of armed conflict risks by comparing bank lending behavior before and after the onset of a given conflict, with a particular focus on regions geographically close to war zones. Additionally, the project analyzes whether state-owned banks continue lending during crises—potentially pursuing political or strategic goals, such as supporting key sectors (e.g., defense, energy) or state-owned enterprises. The study also examines how international sanctions affect banks' lending practices, depending on ownership and the political stance of the host country.

This study is particularly relevant in the current climate, where geopolitical instability has become one of the most serious threats to global economic and financial stability. The results will provide key lessons for policymakers, central banks, and financial regulators on how to effectively protect economies and ensure stable access to financing during periods of international conflict.