Freeze! Financial Sanctions and Bank Responses.

This article examines how financial sanctions imposed by Germany on behalf of the European Union (EU) and the United Nations (UN) affect the lending behavior of German banks and their foreign affiliates. Using regulatory data from 2002 to 2015, the study finds that while German domestic banks reduce lending to sanctioned countries by about 37%, their foreign affiliates often increase lending, particularly when located in host countries that either do not formally enact the sanctions or lack strong institutions and anticrime policies to enforce them. The analysis highlights that differences in enforcement—not just formal adoption—of sanctions across jurisdictions create distortions in international bank competition and capital flows. Additionally, the study shows that German bank subsidiaries abroad increase lending more than foreign branches, likely due to differing legal liabilities and compliance costs. These findings suggest that harmonizing enforcement capabilities alongside formal sanction rules is crucial to ensuring effective and uniform financial sanctions globally.