Geopolitical risk, bank lending and real effects on firms: evidence from the Russian invasion of Ukraine

Peter McQuade, Cosimo Pancaro, Alessio Reghezza () and Pauline Avril

No 3143, Working Paper Series from European Central Bank

Abstract: This paper investigates whether geopolitical risk causes a reduction in bank lending. In particular, it focuses on how the increase in geopolitical risk stemming from the Russian invasion of Ukraine affected euro area bank credit supply. Matching granular supervisory and credit register data and using a panel difference-in-difference approach, the results show that banks with larger exposure to the increase in geopolitical risk cut lending significantly more than those with smaller exposure. Banks with greater exposure raised impairments despite exhibiting similar levels of credit distress to their peers, suggesting that the fall in lending was driven by uncertainty. Moreover, firms that were heavily reliant on banks with high exposure to geopolitical risk were unable to fully substitute this shortfall in credit by borrowing more from less affected banks, which significantly constrained firm investment and employment. JEL Classification: G1, G21, E22

Keywords: banks; financial markets; uncertainty (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-cis, nep-eec, nep-rmg and nep-tra
Note: 2104363
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253143

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