Financial Protectionism: The First Tests

28 Pages Posted: 23 May 2011 Last revised: 27 Aug 2021

See all articles by Andrew Kenan Rose

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Tomasz Wieladek

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: May 2011

Abstract

We provide the first empirical tests for financial protectionism, defined as a nationalistic change in banks' lending behaviour, as the result of public intervention, which leads domestic banks either to lend less or at higher interest rates to foreigners. We use a bank-level panel data set spanning all British and foreign banks providing loans within the United Kingdom between 1997Q3 and 2010Q1. During this time, a number of banks were nationalised, privatised, given unusual access to loan or credit guarantees, or received capital injections. We use standard empirical panel-data techniques to study the "loan mix," domestic (British) loans of a bank expressed as a fraction of its total loan activity. We also study effective short-term interest rates, though our data set here is much smaller. We examine the loan mix for both British and foreign banks, both before and after unusual public interventions such as nationalisations and public capital injections. We find strong evidence of financial protectionism. After nationalisations, foreign banks reduced the fraction of loans going to the UK by about eleven percentage points and increased their effective interest rates by about 70 basis points. By way of contrast, nationalised British banks did not significantly change either their loan mix or effective interest rates. Succinctly, foreign nationalised banks seem to have engaged in financial protectionism, while British nationalised banks have not.

Suggested Citation

Rose, Andrew Kenan and Wieladek, Tomasz, Financial Protectionism: The First Tests (May 2011). NBER Working Paper No. w17073, Available at SSRN: https://ssrn.com/abstract=1848588

Andrew Kenan Rose (Contact Author)

University of California - Haas School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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Tomasz Wieladek

Bank of England ( email )

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