Economic sanctions and global banking flows: The moderating roles of financial market properties and institutional quality

Abstract

This paper investigates the effects of economic sanctions (ES) on global banking flows (GBF) using 4022 pairs of 207 countries during the period 1995­2018. We use a structural gravity model combined with the rich Global Sanction DataBase introduced by Felbermayr et al. ES include various forms of sanction, including arms, military, trade, financial, travel, and other sanctions, whereas GBF reflect cross-border lending. Our empirical results show a negative association between ES and GBF. The heterogeneous effects of ES on GBF depend on the types of sanctions. Furthermore, both properties of financial markets and the institutional quality of the target country play a decisive role in moderating the ES-GBF nexus. Specifically, the consequences of ES become more severe when target countries feature a high level of financial market development, more open financial markets, poor credit information sharing, a more competitive banking market, and a high degree of financial openness, while better institutional quality limits the adverse impact of sanctions.