Global banking and geopolitics through time

This paper examines asymmetries in the effects of geopolitical shocks on international bank credit, contrasting adverse events, such as Russia’s invasion of Ukraine, with positive events like the fall of the Berlin Wall. 

Using confidential data from the BIS International Banking Statistics from 1977 to 2024, we analyze credit dynamics between up to 12,000 pairs of countries through the lens of their geopolitical differences. Our findings reveal that such differences impacts international banking activity over time. Negative shocks reduce credit by 10-20% more between geopolitical blocs than they do within blocs. 

In contrast, positive shocks have no comparable effect on credit, even when boosting trade flows. We hypothesize that these asymmetries stem from the higher level of trust required for international bank credit compared to trade in goods, as the former involves a more pronounced inter-temporal dimension, demanding a greater degree of commitment over time.