DP19743 Violent Conflict and Cross-Border Lending
How do violent conflicts shape cross-border lending? Using comprehensive data on syndicated loans by 14,021 creditors to firms in 179 countries (1989--2020), we document a dual effect when violent conflict erupts: cross-border lenders reduce overall lending relative to domestic banks but significantly increase their financing of firms in military and dual-use industries. This credit reallocation occurs across both state-owned and privately-owned foreign banks, with stronger effects among lenders with less prior specialization in the conflict country or military sectors and those domiciled in politically non-aligned nations. The effect is both geographically contained (not spilling over to neighboring countries) and temporally limited (dissipating soon after conflicts end). Our findings reveal how global lenders strategically redirect credit to military sectors during armed conflicts, facilitating defense mobilization despite reducing overall country exposure.
