Bank for International Settlements working paper links higher geopolitical tensions to weaker cross-border bank lending and stronger monetary policy spillovers

The Bank for International Settlements has published a working paper assessing how geopolitics and major-central-bank monetary policy jointly shape cross-border bank lending, finding that rising geopolitical tensions significantly dampen cross-border lending and amplify the international transmission of monetary policy, especially when tensions rise alongside monetary policy tightening. The analysis uses bilateral cross-border bank claims by bank nationality from the BIS locational banking statistics by nationality, split by currency (USD, EUR, JPY, GBP and CHF) and borrower sector, covering major advanced-economy lending systems to borrowers in over 180 countries from 2012:Q2 to 2023:Q4. Geopolitical tensions are proxied by United Nations voting disagreement, bilateral sanctions and geopolitical risk indices, while monetary policy is captured using currency-specific shadow rates. Identification relies on “third-country” lending in reserve currencies and excludes own-currency lending to mitigate endogeneity. Results indicate larger and more consistent effects for materialised tensions (UN voting disagreement and sanctions) than for geopolitical risk indices, with UN voting disagreement showing the strongest impact. A “double whammy” setting of tightening monetary policy and worsening tensions is associated with particularly pronounced declines in cross-border bank flows, and a variance decomposition attributes around half of the residual variation in lending to geopolitics, compared with roughly 30% to monetary policy and 20% to their interaction.