Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331611 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12145
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
How do banks respond to geopolitical risk, and is this response distinct from other macroeconomic risks? Using U.S. supervisory data and new geopolitical risk indices, we show that banks reduce cross-border lending to countries with elevated geopolitical risk but continue lending to those markets through foreign affiliates---unlike their response to other macro risks. Furthermore, banks reduce domestic lending when geopolitical risk rises abroad, especially when they operate foreign affiliates. A simple banking model in which geopolitical shocks feature expropriation risk can explain these findings: Foreign funding through affiliates limits downside losses, making affiliate divestment less attractive and amplifying domestic spillovers.
Subjects: 
geopolitical risk
bank lending
credit risk
international spillovers
JEL: 
F34
F36
G21
Document Type: 
Working Paper
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