No Guarantees, No Trade: How Banks Affect Export Patterns

How relevant are financial instruments to manage risk in international trade for exporting? Employing a unique dataset of U.S. banks' trade finance claims by country, this paper estimates the effect of shocks to the supply of letters of credit on U.S. exports. Our identification strategy relies on two observations. First, banks vary in their importance as providers of letters of credit across countries. Second, a reduction in the supply of letters of credit by a bank should have a larger effect on exports to those destinations where the bank takes a larger share of the trade finance market. We show that a one-standard deviation negative shock to a country's supply of letters of credit reduces U.S. exports by 1.5 percentage points. This effect is stronger for smaller and poorer destinations. It more than doubles during crisis times, suggesting a non-negligible role for finance in explaining the Great Trade Collapse.