Cross-border spillovers of bank regulations: Evidence of a trade channel

We document a novel channel through which domestic bank regulations generate cross-border real effects via international trade. Our setting is a one-time, unexpected increase in loan loss provisions in Spain in 2012. Using comprehensive administrative data from the Spanish credit register matched with customs data, we show that importers relying on the most affected banks experienced sharp reductions in credit supply, which led to a decline in their purchases abroad. Leveraging bilateral trade data at the country-product level, we find that Spanish aggregate imports declined, indicating limited reallocation across firms: the shock on highly exposed importers was not offset by the expansion from less exposed ones. This decline in Spain’s import demand is transmitted internationally, as total exports of Spain’s trading partners fell. The effect was stronger for countries with less developed financial systems, for exporters facing higher bilateral trade costs vis-à-vis Spain, and for products that are harder to reallocate across markets. Our findings highlight international trade as a key transmission mechanism of banking regulation –and domestic shocks more broadly– with implications for the cross-border coordination of prudential policy.