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 2025-12-19
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.