The Federal Reserve Board published research assessing how geopolitical tensions affect cross-border bank lending using bilateral cross-border bank claims by nationality. The paper finds that rising geopolitical tensions between countries significantly dampen cross-border lending and also strengthen the international transmission of monetary policy from major central banks, particularly when tensions coincide with monetary policy tightening. The analysis measures geopolitical tensions using indicators such as disagreements in United Nations voting, broad sanctions, and sentiment-based geopolitical risk indices, and applies difference-in-differences estimation. It concludes that geopolitics is roughly as important as monetary policy in driving cross-border lending flows.
Federal Reserve Board 2025-02-24
Federal Reserve Board paper links higher geopolitical tensions to weaker cross-border bank lending and stronger monetary policy spillovers
The Federal Reserve Board's research reveals that geopolitical tensions significantly reduce cross-border bank lending and enhance the international transmission of monetary policy, especially during monetary policy tightening. The study uses indicators like UN voting disagreements, sanctions, and geopolitical risk indices, concluding that geopolitics is as influential as monetary policy in affecting lending flows.