Does geopolitical risk affect bank lending behavior? Evidence from Europe

This paper investigates the impact of geopolitical risk (GPR) on bank credit growth by utilizing quarterly data from banks between 2008Q1 and 2023Q4 in 18 European countries. The main variable of interest is the GPR index developed by Caldara and Iacoviello (2022), which assesses risk at a country-specific level. We find that GPR leads to a decline in total lending, which is attributed to foreign activities, while no significant impact on domestic lending is documented. Our results also show a more resilient lending behavior in response to geopolitical shocks from state-owned banks compared with private banks, implying that the response of bank total lending to GPR is contingent on bank ownership structure. Moreover, as expected, the recent Russian invasion of Ukraine has amplified the negative effect of GPR on total lending, especially for those banks operating in countries located closer to Ukraine and Russia, and those that are more dependent on Russian gas. Finally, we find that the credit behavior of large and listed banks is unaffected by GPR, as are those countries with higher values of gross domestic product, those belonging to the eurozone, and those with low economic policy uncertainty, thus lending activity in these countries continues.