Abstract
When do political shocks in core countries reverberate across the global financial system? We identify cross-border banking as a distinct transmission mechanism for political shocks. Democratic processes that advance (undermine) the interests of the global banking industry in core economies benefit (hurt) countries with closer banking ties to these economies. Empirically, we leverage the unanticipated outcomes of the 2016 US presidential election and the Brexit referendum to identify the role of cross-border banking in transmitting these shocks. We show that US global banks benefited disproportionately from the US election surprise. Accordingly, countries with closer ties to US banks fared relatively better; exposure to US bank flows cushioned the negative effect of the election. Evidence from Brexit reinforces the banking-channel hypothesis. The findings further our understanding of the role of global banks in the international financial order and underscore the need for more research on the political economy of global banking.
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Notes
“Donald Trump’s Surprise Early Success Causes a Sell-Off in Equities and the Mexican Peso.” The Economist, November 8, 2016.
“Clinton vs. Trump – Where They Stand on Wall Street.” The Wall Street Journal, October 25, 2016. See also “Donald Trump Says He Would Dismantle Dodd-Frank Wall Street Regulation.” Fortune, May 18, 2016.
Using a broad-based index for the US stock market allows us to assess the election’s effect on the financial sector relative to the rest of the economy. Alternatively, we use the S&P Banks Select Industry index to capture market risks specific to the banking industry, with no substantive changes in results.
“Who Will Be President?” The New York Times, November 8, 2016.
“US Presidential Election: Clinton backed in as FBI investigation comes to nothing.” Betfair, November 7, 2016.
See “Wall Street doesn’t just see a Hillary win, it sees a landslide.” CNBC, August 29, 2016. See also “Wall St is pretty certain Hillary Clinton will be president.” CNBC, April 7, 2016. See also “Stock Futures Plunge as Donald Trump Posts Surprising Win.” The Wall Street Journal, November 9, 2016.
“Donald Trump’s Surprise Early Success Causes a Sell-Off in Equities and the Mexican Peso.” The Economist, November 8, 2016.
“Clinton vs. Trump – Where They Stand on Wall Street.” The Wall Street Journal, October 25, 2016. See also “Donald Trump Says He Would Dismantle Dodd-Frank Wall Street Regulation.” Fortune, May 18, 2016.
“Hillary Clinton: How I’d Rein In Wall Street.” The New York Times, December 7, 2015.
See BlackRock Investment Institute (2016). See also “Why Bank Stocks Have the Most to Lose in the U.S. Election.” Bloomberg, November 1, 2016.
The full list of funds appears in Table S2 of the Supplementary Appendix.
“Banks Might Have Started Worrying About Brexit.” Bloomberg, October 22, 2018.
We thank an anonymous reviewer for making this point.
“New York Gains From the City of London’s Pain.” Bloomberg, January 22, 2021.
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Acknowledgements
For comments and suggestions, we thank George Akerlof, Eric Arias, Dan Cao, Mark Copelovitch, Marina Duque, Alexandra Guisinger, Jeffry Frieden, Abraham Newman, Dennis Quinn, Peter Rosendorff, and audiences at Princeton University, the 2017 meeting of the American Political Science Association, and the 2017 meeting of the International Political Economy Society. We thank Yichen Gong for research assistance. Funding from the Niehaus Center for Globalization and Governance at Princeton University and from Georgetown University is gratefully acknowledged.
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Author contributions to research design and conceptualization: R.C. (50%), A.K. (50%); statistical analysis: R.C. (70%), A.K. (30%); writing: R.C. (50%), A.K. (50%). The order of authors is chosen alphabetically.
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Cunha, R., Kern, A. Global banking and the spillovers from political shocks at the core of the world economy. Rev Int Organ 17, 717–749 (2022). https://doi.org/10.1007/s11558-021-09446-w
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DOI: https://doi.org/10.1007/s11558-021-09446-w