Financial Protectionism: the First Tests

Abstract

During the crisis of 2008-09, many countries engaged in bank nationalizations and other large public interventions in the financial sector. Did such actions lead to nationalistic changes in financial activities? In this paper we provide the first empirical tests for “financial protectionism.” Manifestations of financial protectionism include a decrease in the quantity and/or an increase in the price of loans that foreign banks make to domestic borrowers. We provide evidence of financial protectionism from a bank-level panel data set spanning all British and non-British (foreign) banks providing loans within the United Kingdom between 1997Q3 and 2010Q1. During this time, a number of banks were nationalized, privatized, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the “loan mix,” British loans of a bank expressed as a fraction of its total loan activity. We also examine effective short-term interest rates, though our data set here is smaller. We examine the loan mix for British and foreign banks, both before and after unusual public interventions such as nationalizations and public capital injections. We find strong evidence of financial protectionism. After nationalization, non-British banks reduced the fraction of British loans by about eleven percentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalized British banks did not significantly change either their loan mix or effective interest rates. Succinctly, foreign nationalized banks seem to have engaged in financial protectionism, while British nationalized banks did not.