Global banking and the spillovers from political shocks at the core of the world economy

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.

Democracy and Markets in a Partially Globalized World: Local and Global Financial Market Responses to Elections in Developing Countries

“…The findings connect the literature on the politics of capital mobility and the literature on the impact of political events on financial markets. Scholars have recently turned their attention to understanding the mechanisms through which political events affect the global financial system, including the impact of international politics on global markets (Genovese 2021;Wilf 2016;Bechtel and Schneider 2010) and the spillover effects of electoral shocks onto foreign currency markets and the global banking system (Slaski 2021;Cunha and Kern 2022). The present results refine our understanding of these mechanisms by exploring the implications of persistent barriers to financial integration in developing countries.…”

When Volatility Begins at Home: Globalization, Elections, and Financial Market Volatility in Emerging Markets

“…Finally, the findings build on and advance scholars' knowledge of how domestic political events affect the global financial system. Recent work examines the impact of international politics on global markets (Genovese 2021;Wilf 2016) and the spillover effects of electoral shocks onto foreign currency markets and the global banking system (Slaski 2021;Cunha and Kern 2022). Most of this work focuses on the effect of political events in developed democracies.…”

Political shock and international students: Estimating the “Trump effect”

“…First, the Trump effects on various outcomes have received wide attention in the news, social media, and academic research. The unexpected victory of Trump in the 2016 United States presidential election has generated an increasing number of studies exploring outcomes such as racial discrimination (Newman et al, 2021), public health (Smith, 2022), EU’s popularity (Minkus et al, 2019), the reputation of the United States abroad (Carreras et al, 2021; Haman and Školník, 2021; Bateson and Weintraub, 2022), trade protectionist sentiment and policy (Coupe and Shepotylo, 2021; Essig et al, 2021), and the financial and currency markets (Cunha and Kern, 2022; Slaski, 2021). Our research provides a useful addition to that literature by analyzing a different type of outcome.…”