Jin Cao (Norges Bank) - The Nobel Peace Prize Trade Shock, Bank Lending, and the Real Economy

Co-authores: Valeriya Dinger (University of Osnabrück and the Leeds University Business School), Ragnar Juelsrud (Norges Bank) and Karolis Liaudinskas (Norges Bank) 

In this paper, we investigate how trade shocks propagate to the real economy through banking sector. We exploit an exogenous trade shock – the Chinese implicit ban of Norwegian salmon imports after Norway awarded 2010 Nobel Peace Prize to a Chinese dissident. Combining credit register data on firm-bank relationships with balance sheet reports of banks in Norway, we find that banks with higher exposure to fish farms cut back lending to the real economy after 2010. We further find that this effect is not caused by capital damage of banks with high exposure to fish farms; instead, trade uncertainty increases these banks’ concern on their exposure to fish farms, forcing them to increase loan loss provision and refrain from taking further credit risks.

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