Geopolitics Meets Monetary Policy: Decoding Their Impact on Cross-Border Bank Lending

RePEc Short ID: pst550
ORCID iD: 0000-0003-4633-4631

Pradhan, Swapan-Kumar; Stebunovs, Viktors; Takáts, Előd; Temesvary, Judit

doi:10.17016/IFDP.2025.1403

Working Paper

Geopolitics Meets Monetary Policy: Decoding Their Impact on Cross-Border Bank Lending

Abstract: We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending.

Keywords: Monetary policy; Geopolitical tensions; Cross-border claims; Diff-in-diff estimations;

JEL Classification: E52; F34; F42; F51; F53; G21;

https://doi.org/10.17016/IFDP.2025.1403