The paper explores the impact of the Russia-Ukraine conflict and associated sanctions on the stock returns of European banks. Specifically, it asks how geopolitical risk and financial sanctions targeting Russia influence the performance of banks across Europe, particularly those with high exposure to Russian markets or proximity to the conflict zone.
The authors utilize an event study methodology to analyze abnormal stock returns for 100 of the largest European banks, focusing on the onset of the conflict in February 2022. They further incorporate cross-sectional analyses to examine the role of country-specific and bank-specific factors, including exposure to Russia, size, profitability, and institutional ownership, in determining the observed market reactions.
The results show that European banks, on average, experienced significant negative stock market reactions following the onset of the conflict. Banks with high exposure to Russian markets or listed in Russia suffered the largest losses, driven by financial sanctions, reputational risks, and operational impairments. However, the study finds no evidence of a “proximity penalty” for banks located in countries bordering Russia or Ukraine. Bank-specific factors, such as larger size, higher profitability, and greater operational efficiency, mitigated the extent of negative abnormal returns, indicating resilience in certain institutions.
Policy implications emphasize the importance of managing systemic risks associated with geopolitical conflicts. Policymakers should aim to strengthen the resilience of financial institutions through enhanced risk management practices and diversification strategies.
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