Geopolitical risk affected the banks’ lending
News, Staff memo Following Russia’s full-scale invasion of Ukraine, Swedish banks increased their lending to companies. At the same time, lending was redirected away from energy-intensive and financially weak companies. Furthermore, banks that were more exposed to geopolitical risk tightened their lending policies more than others.
A new analysis by Cristina Cella of the Financial Stability Department shows that Swedish banks quickly adjusted their lending practices following the outbreak of war in 2022. Although total lending increased, credit growth was weaker for companies in energy-intensive sectors and for financially vulnerable companies. Borrowing costs, on the other hand, changed relatively little. This suggests that the adjustment took place primarily through the selection of companies granted loans, rather than through the pricing of loans via higher interest rates.
Geopolitical risk rose sharply in the wake of the invasion and affected the banks indirectly, partly through higher energy prices, inflation and financial turmoil. However, the effects differed somewhat between the banks. The banks that were already more vulnerable to geopolitical risk before the war reduced their lending more than others. This shows that the same external shock can have different effects on the financial system.
The results show that stable credit growth at an aggregate level can mask significant changes in the distribution of credit amongst companies. When banks reduce lending to more vulnerable companies, this can increase the pressure on those companies. At the same time, a more cautious approach to lending can help strengthen the banks’ resilience in an uncertain global environment.