FATF

• However, our latest research shows that even universally adopted sanctions can throw a spanner into the works of the global financial system for want of being enforced everywhere.
• Since the invasion of Ukraine in 2022, much ink has been spilled over the sanctions on Russia.
• And since the late 1980s, there has been a shift toward imposing financial sanctions, which involve freezing assets and investments.

How sanctions impact lending

• Sanctions will impose extra compliance costs on a bank, as it must fulfill reporting requirements and undertake due diligence checks to ensure its transactions are legal.
• The bank will also have to factor in the litigation costs and the reputational risk involved if its due diligence should fail.
• We wanted to understand how these costs and risks alter lending decisions.

Location, location, location

• The data show how much each bank in Germany was lending in foreign countries from 2002 to 2015.
• Importantly, German banks are also required to record how much their foreign affiliates (branches and subsidiaries outside Germany) are lending in each country.

The importance of the Financial Action Task Force

• Founded in 1989, the Financial Action Task Force (FATF), also known by its French name, Groupe d’action financière (GAFI), is an intergovernmental organisation that sets international standards to allow national authorities to go after illicit funds linked to money laundering, terrorism and other related threats to the integrity of the international financial system.
• Our analysis showed that German bank affiliates located outside the FATF increased their positions in sanctioned countries by an average of 95% relative to German banks inside the FATF.

Levelling the playing field

• One key takeaway from this is that, regardless of whether it is the litigation risks or compliance costs that ultimately drive the decision to lend in sanctioned countries (or not), you don’t have a level playing field.
• Banks in locations with weaker standards for the integrity of the financial system seem to find lending in sanctioned countries more attractive.
• To guarantee a level playing field, it is also vital to make sure all countries effectively comply with these sanctions.

Grant of EUR 5000 from the French National Research Agency (ANR), “Investissements d’Avenir” (LabEx
Ecodec/ANR-11-LABX-0047). Deutsche Bundesbank (German central bank) provided on-site access to the database External Position Report and free accommodation on the premises of the central bank during the author’s research visits.