Brexit and Bank Lending in the Transition Region: Political Risk Contagion and the Real Economy

Deyan Radev, Book (St. Kliment Ohridski University Press), 2024

Cite as: Radev, D., 2024, “Brexit and Bank Lending in the Transition Region: Political Risk Contagion and the Real Economy”, St. Kliment Ohridski University Press, ISBN: 978-954-07-5946-3.

When a political shock hits the EU, can credit tighten hundreds of kilometers away?

The 2016 Brexit referendum was a political event with global repercussions – but its financial spillovers are often discussed only in terms of the UK and the EU core. This book asks a different question: how does a major political shock transmit to small open economies in Emerging Europe, and does it reach the real economy through bank lending?

What the book does

Brexit is treated as a natural experiment: the referendum outcome was widely perceived as unexpected, and it was exogenous to the Transition region—countries there did not cause the shock, but they are deeply connected to Western Europe through cross-border banking ownership.

To study transmission, the book builds and uses a uniquely rich dataset on bank ownership in Emerging Europe—covering 528 banks (about 228 domestic and 300 foreign-owned). This ownership mapping enables the analysis to distinguish domestic vs. foreign-owned banks, and to examine how state ownership and politically connected/oligarch ownership shape lending behavior when political risk spikes.

Empirically, the book applies difference-in-differences methods and checks pre-trend comparability, which is crucial for interpreting post-referendum divergence in lending as evidence of shock transmission rather than pre-existing differences.

What it finds

The lending response is not uniform across the region. The most robust evidence of credit tightening appears in the Balkans, where domestic banks experience a statistically significant decline in lending growth after Brexit – on the order of ~1.34–1.62 percentage points relative to foreign-owned banks. In the CIS, the book finds no significant negative effect, while estimates for the Visegrad Four + Baltics are negative but not statistically strong at conventional levels.

This heterogeneity matters: it suggests that political risk contagion is conditional—it bites harder where banks and economies are more vulnerable.

Why the effect is stronger in some places

Two structural amplifiers stand out in the Balkan results:

• Bank fragility: Domestic banks with higher NPL ratios reduce lending more after Brexit, consistent with the idea that weak balance sheets react more defensively under uncertainty.
• Economic openness: More open economies show a stronger post-Brexit lending contraction—political risk transmits faster where cross-border linkages are deeper.

Ownership and political economy: not all “domestic” banks are alike

A distinctive feature of the book is its explicit focus on who controls the bank, not just what country it operates in.

• Domestic state-owned banks tend to show lower lending growth after Brexit (especially in the Balkans), whereas foreign state ownership does not exhibit the same average negative pattern.
• Oligarch-owned banks behave differently across subregions: lending appears to stall in the Balkans, turns negative in the CIS, and looks more positive in the Visegrad–Baltic group—highlighting that institutional context strongly conditions outcomes.

Why it matters

Political shocks are often treated as “news risks.” This book shows they can become credit risks—transmitted through banks’ funding, risk appetite, and lending standards. For policymakers, the message is practical: financial stability and credit supply can be affected by external political events, especially in regions where bank balance sheets are fragile and ownership structures create strong transmission channels.

Key takeaways

• Political risk travels via credit: major political events can tighten lending even outside the shock’s origin region.
• Ownership structure is a transmission mechanism: domestic vs. foreign ownership, state control, and politically connected ownership can change how shocks pass into the real economy.
• The Transition region is a strong laboratory for causal inference: high exposure + institutional diversity + an exogenous shock.
• Heterogeneity is the result: the strongest and most robust effects are concentrated in the Balkans, and are amplified by NPLs and openness.
• Reusable framework: a blueprint for analyzing other large shocks (e.g., COVID-19, war-related uncertainty) with similar identification logic.