Financial Development Under Economic Sanctions: Short‐Run Market Responses and Long‐Run Institutional Adjustment

This paper examines how the financial development of the target economy evolves under the long‐lasting economic sanctions, emphasizing the temporal patterns of the impact. Using panel data for 136 economies from 1980 to 2021 and an event‐study approach, we identified a temporal pattern that illustrates how economic sanctions exert a significant negative impact on financial development, progressing step by step from the market to the institutional level. These patterns are especially evident in the asymmetric effects between financial markets and institutions. Financial markets exhibit earlier and short‐lived reactions, characterized by rapid responses to external shocks driven by investor expectations. In contrast, financial institutions display delayed responses, with long‐term effects shaped by risk‐buffering and restructuring mechanisms. We have illustrated a multi‐stage transmission process. Initially, economic sanctions trigger market disruptions. This is followed by institutions reallocating resources to maximize profit/efficiency, which reshapes the financial system over time.