Financial services trade restrictions and lending from an international financial centre

This paper examines how international lending of UK-based banks is affected by services trade restrictions on commercial banks applied abroad. Exploiting heterogeneity in banks’ cross-border activities, we find evidence that banks without a local affiliate presence abroad cut back their non-bank lending to countries applying restrictions, and vice versa when restrictions are liberalised. On the other hand, banks with a local presence reduce their intragroup loans, but substitute for this by increasing direct cross-border lending to non-banks. These findings suggest that increasing services trade restrictiveness may lead global banks to reshape their business model for cross-border lending. Services trade restrictions that act on the intensive margin of lending, such as barriers to competition, appear to be the primary drivers of this substitution from ‘local’ to ‘global’ financial intermediation.