Do community banks contribute to international trade? Evidence from U.S. Data

Although bank letters of credit are considered the lifeblood of international commerce, there is little empirical evidence on their role in intermediating international trade transactions in the U.S. In this paper, we investigate if and to what extent commercial letters of credit (CLCs) provided by small, community banks contribute to the state-level volume of international trade. The results show that aggregate CLCs issued by small U.S. banks have an economically and statistically significant explanatory power in describing state-level international trade. The relationship between the volumes of small bank commercial letters of credit and international trade is mostly driven by imports. Community banks’ contribution to state-level international trade is particularly evident in states with a high concentration of small manufacturing firms, which are known to be heavily dependent on community banks for financing.