SSRN Working Paper – ‘Crime and Punishment’? How Banks Anticipate and Propagate Global Financial Sanctions’

Mikhail Mamonov, Anna Pestova, and Steven Ongena

December 2022


We study the impact of global financial sanctions on banks and their corporate borrowers in Russia. Financial sanctions were consecutively imposed between 2014 and 2019, allowing targeted (but not yet sanctioned) banks to adapt their international and domestic exposures in advance. Using a staggered difference-in-differences approach with in-advance adaptation to anticipated treatment, we establish that targeted banks immediately reduced their foreign assets and actually expanded their international borrowings, compared to similar other banks. Once sanctioned, however, these banks not only further reduced their foreign assets but also started to decrease their international borrowings as well and faced considerable outflow of domestic private deposits. The introduction of government support prevented the banks’ disorderly failures and resulted in credit reshuffling: the banks contracted their lending to the domestic corporate sector by at least 4% of GDP and increased household lending by almost the same magnitude, mostly offsetting the total economic loss. Further, we introduce a two-stage treatment diffusion approach that flexibly addresses potential spillovers of the sanctions to private banks with political connections. Using unique hand-collected board membership and bank location data our approach shows that, throughout this period, politically-connected banks were not all equally recognized as potential sanction targets. Finally, using the syndicated loan data we establish that the negative real effects of sanctions materialized only when sanctioned firms were borrowing from sanctioned banks

‘Crime and Punishment’? How Banks Anticipate and Propagate Global Financial Sanctions’