Israel on Monday October 9, 2023, declared war and intensified its bombardment of the Gaza Strip in retaliation for a major surprise attack by Hamas. This reminds us of a war that took place 50 years ago and which had massive economic impact. Unfortunately, this event is adding to wars in today's world, and the Russian-Ukrainian war that started in February 2022 is still ongoing. Very sad to see what this means for people in the respective regions.
From an academic perspective, we may ask what impact wars may have on the stability of banks globally as a worsening in financial conditions may put financial systems under stress, potentially putting financial aid and fund availability at risk. In a recent study, we look at the relation between crisis events and risk in the banking sector. While the impact is milder during the Russian-Ukrainian war sample than during other crises, downside risk in the global banking sector is substantially increased. We observe in particular that Russian banks, obviously under the largest pressure in the given situation, proactively responded to financial sanctions by decreasing their foreign assets held in developed countries. Our results confirm that banks that are able to take strategic measures will be able to mitigate potential asset losses resulting from adverse war market conditions thereby preserving liquidity and adhering to regulatory capital requirements. Banks need effective hedging mechanisms that reduce the impact of adverse volatility on their balance sheets.
see: Batten et al. (2023) Volatility impacts on global banks: Insights from the GFC, COVID-19, and the Russia-Ukraine war, Journal of Economic Behavior and Organization 215: 325–350.