Trade conflicts and credit supply spillovers: Evidence from the nobel peace prize trade shock

Jin Cao, Valeriya Dinger, Ragnar Juelsrud and Karolis Liaudinskas

No 8/2022, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: In this paper, we examine how a trade conflict's impact on the real economy can be amplified by financial intermediaries. After the Norwegian Nobel Peace Prize Committee awarded the 2010 Nobel Peace Prize to Chinese dissident Liu Xiaobo, China in practice banned imports of Norwegian salmon. The ban was an unexpected trade shock to the Norwegian salmon industry. Using bank balance sheet and credit register data, we trace how this trade shock affected the lending behavior of banks highly exposed to the salmon industry when the shock occurred. We find that, in the years following the trade shock, highly exposed banks cut back lending to non-salmon firms and households by 3-6 percent more than other banks. Furthermore, we find that the reduction in lending was not driven by the erosion of bank capital, but rather by the shift in expectations about the performance of loans to salmon producers, which drove highly exposed banks to increase their loan loss provisions and reduce risk-taking.

Keywords: trade shock; bank lending channel; expectation shock (search for similar items in EconPapers)
JEL-codes: F14 G21 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cna and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www.econstor.eu/bitstream/10419/266092/1/BOFIT-DP-2208.pdf (application/pdf)

Related works:
Working Paper: Trade conflicts and credit supply spillovers: Evidence from the Nobel Peace Prize trade shock (2023)
Working Paper: Trade Conflicts and Credit Supply Spillovers: Evidence from the Nobel Peace Prize Trade Shock (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:bdp2022_008

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