Swedish banks reallocate credit from vulnerable firms after invasion

The memo, authored by Cristina Cella, examines how Swedish banks adjusted credit supply following Russia's full-scale invasion of Ukraine in February 2022.

Using loan-level data from the KRITA database and bank-level measures of geopolitical risk exposure, the study found that overall credit expanded.

Loan volumes rose by approximately 2.4 percent in the invasion month and by about 3.8 percent one month after, relative to the preceding month.

However, this aggregate growth masked a significant reallocation of credit.

Lending was shifted away from energy-intensive and financially vulnerable firms.

Banks with greater pre-invasion exposure to geopolitical risk tightened their lending more aggressively to these specific segments, indicating a heterogeneous response across the banking sector to the macro-financial shock.

The reallocation was particularly evident for energy-intensive industries, such as mining and chemicals, which faced a sharp surge in oil and gas prices.

Lending to these sectors increased by about 1.7 to 1.8 percentage points less than to other sectors after the invasion.

Additionally, these firms experienced a relative increase in borrowing costs of 1.6 to 2.1 basis points.

The study emphasizes that geopolitical risks, through channels like higher risk premia and disrupted capital flows, significantly impact credit supply, especially in small open economies like Sweden where banks play a central role in corporate financing.