The European Central Bank published Working Paper No 3143 analysing whether the surge in geopolitical risk triggered by Russia’s invasion of Ukraine reduced euro area banks’ credit supply and translated into real effects for firms. The paper, which does not represent ECB views, finds that banks more exposed to the shock cut lending more sharply and that firms reliant on those banks faced constraints that reduced borrowing, investment and employment. Using AnaCredit loan-level data matched with ECB supervisory statistics and firm information from Orbis Europe for 363 banks and over half a million firms (2021Q1–2023Q1), the authors construct a bank-level geopolitical risk index based on bank country exposures and country-level geopolitical risk indicators and estimate a bank-firm difference-in-differences model. A one standard deviation increase in exposure is associated with about a 9.2% reduction in corporate lending after the invasion, with the effect lasting around three quarters and operating through both reduced lending in existing relationships and fewer new relationships (a 6.1 percentage point drop in the probability of forming a new relationship). More exposed banks raised impairment volumes by around 24% without a corresponding increase in days past due, consistent with an uncertainty-driven pullback rather than realised credit deterioration; larger capital buffers (greater distance to the maximum distributable amount) attenuated the lending contraction, while larger banks cut more. Lending also contracted more in sectors with higher dependence on inputs from countries aligned with Russia (an additional 2%–3% relative reduction). At the firm level, companies that sourced at least half of pre-war borrowing from high-exposure banks recorded a roughly 1.5% relative decline in total borrowing and, between 2021 and 2022, lower investment (about 8%) and weaker employment outcomes (about 0.6%).
European Central Bank 2025-11-05
European Central Bank working paper finds Ukraine-war geopolitical risk tightened euro area bank credit and weighed on firm investment and jobs
The European Central Bank's Working Paper No 3143 examines the impact of geopolitical risk from Russia's invasion of Ukraine on euro area banks' credit supply and firms' real outcomes. The study finds that banks with higher exposure to geopolitical risk reduced lending by 9.2%, affecting firms' borrowing, investment, and employment. Larger banks and those with smaller capital buffers experienced more significant lending contractions, particularly in sectors reliant on Russian-aligned countries.