Monetary and Economic Department of the Bank for International Settlements
BIS Working Papers No 1338
Focus
This paper investigates how geopolitical events, both negative and positive, affect global banking activity. Based on confidential banking statistics from the Bank for International Settlements spanning nearly five decades (1977–2024), the research examines how international bank credit between thousands of country pairs is affected by their geopolitical differences. It focuses on several major geopolitical events, such as the Afghan invasion in 1979, the fall of the Berlin Wall in 1989, the annexation of Crimea in 2014 and the invasion of Ukraine in 2022. The study uses gravity models as a benchmark for assessing how geopolitical differences – measured in various ways – affect international banking activity.
Contribution
Geopolitical tensions increasingly shape global trade patterns, but their impact on international banking has been underexplored. Most existing studies focus on trade and foreign direct investment, neglecting the trust-intensive nature of cross-border banking. This paper fills this gap by analysing how geopolitical differences influence banking activity in periods of war and peace. Understanding these forces is crucial, as banks play a central role in the economy and for international integration. The findings provide insights for policymakers and financial institutions navigating an era of heightened geopolitical fragmentation.
Findings
The empirical results show that geopolitical distance between countries tends to weigh on banking activity between them. Negative events lead to a 10–20% larger decline in credit between geopolitical blocs compared with that within blocs. No comparable boost in banking activity occurred after the fall of the Berlin Wall, even as trade took off. This asymmetry may be due to the higher level of trust needed for bank credit compared with trade. The findings suggest that trade recovers more quickly after geopolitical tensions ease, while financial flows take longer to resume.
