Geopolitics, and US banks’ foreign operations
This 2025 Federal Reserve study by Friederike Niepmann and Leslie Sheng Shen also assesses the impact of geopolitics on cross-border bank flows but with a focus on US banks and how their operational structures mediate such risk.
Methodology:
- Data: Confidential U.S. supervisory data (FFIEC 009 foreign exposures, FR Y-14Q loan-level defaults).
- Geopolitical indices: Bank-specific geopolitical risk (BGPR) weighted by banks’ foreign asset shares; earnings-call-derived country-specific GPR.
- Event studies: Crimea annexation (2014) and Russia-Ukraine war (2022) as quasi-natural experiments.
- Theoretical model: Incorporates expropriation risk in foreign affiliates to explain asymmetric adjustments in cross-border vs. local lending.
Key findings:
- Banks reduce cross-border lending to high-GPR countries but maintain affiliate-based lending (local operations).
- Domestic spillovers: U.S. banks cut domestic lending by 5–7% when BGPR rises, driven by affiliate exposures.
- Distinct from other risks: Responses to geopolitical risk differ from macroeconomic/sovereign risks due to expropriation risk of affiliates.
- Funding structure matters: Banks with foreign-funded affiliates reduce domestic lending less, as local liabilities offset asset losses during expropriation.
Geopolitical Risk and Global Banking
Authors: Friederike Niepmann, Leslie Sheng Shen
From: Board of Governors of the Federal Reserve System, Federal Reserve Bank of Boston
Policy implications
Both working papers above underscore the necessity of integrating geopolitical risk assessments into financial stability frameworks, with tailored policies for cross-border liquidity management and affiliate oversight.
Common Insights:
- Macroprudential buffers: Both studies endorse releasable capital buffers to absorb geopolitical shocks.
- Cross-border coordination: Highlight the need for international regulatory cooperation to manage spillovers.
Divergent Recommendations:
- BIS: Prioritize monitoring materialized risks (e.g., sanctions) over broad GPR indices.
- Federal Reserve: Supervisors should focus on banks’ foreign operational structures (affiliates vs. cross-border) to anticipate domestic credit contractions.
Limitations and future research
