Geopolitical rifts cut international bank lending, but peace doesn't bring it back

International bank lending drops significantly between countries with bad geopolitical relations. But when relations improve, lending does not recover at the same rate. This means that once trust is broken, it is harder to rebuild in finance than in trade.

Banks need more trust to lend money across borders than companies need to trade goods. This paper shows that when countries become geopolitical rivals, banks pull back their lending, and that money does not flow back even if relations improve. This makes it harder for countries to get foreign capital if they are seen as politically unstable, even if the instability passes.