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International Trade, Risk and the Role of Banks

  • Friederike Niepmann
  • Tim Schmidt-Eisenlohr

Banks play a critical role in international trade by providing trade finance products that reduce the risk of exporting. This paper employs two new data sets to shed light on the magnitude and structure of this business, which, as we show, is highly concentrated in a few large banks. The two principal trade finance instruments, letters of credit and documentary collections, covered about 10 percent of U.S. exports in 2012. They are preferred for larger transactions, which indicates the existence of substantial fixed costs in the provision and use of these instruments. Letters of credit are employed the most for exports to countries with intermediate degrees of contract enforcement. Compared to documentary collections, they are used for riskier destinations. We provide a model of payment contract choice that rationalizes these empirical findings and discuss implications for the ongoing provision of trade finance.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-04/cesifo1_wp4761.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4761.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4761
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  1. David Hummels & Georg Schaur, 2012. "Time as a Trade Barrier," NBER Working Papers 17758, National Bureau of Economic Research, Inc.
  2. Silvia Del Prete & Stefano Federico, 2014. "Trade and finance: is there more than just 'trade finance'? Evidence from matched bank-firm data," Temi di discussione (Economic working papers) 948, Bank of Italy, Economic Research and International Relations Area.
  3. Thomas William Dorsey & Mika Saito & Armine Khachatryan & Irena Asmundson & Ioana Niculcea, 2011. "Trade and Trade Finance in the 2008-20+L460609 Financial Crisis," IMF Working Papers 11/16, International Monetary Fund.
  4. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05.
  5. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank.
  6. Felici Roberto & Pagnini Marcello, 2005. "Distance, bank heterogeneity and entry in local banking markets," Temi di discussione (Economic working papers) 557, Bank of Italy, Economic Research and International Relations Area.
  7. Niepmann, Friederike, 2013. "Banking across borders," Discussion Papers 19/2013, Deutsche Bundesbank, Research Centre.
  8. JaeBin Ahn, 2011. "A Theory of Domestic and International Trade Finance," IMF Working Papers 11/262, International Monetary Fund.
  9. Galina Hale & Christopher Candelaria & Julian Caballero & Sergey Borisov, 2013. "Bank Linkages and International Trade," Research Department Publications IDB-WP-445, Inter-American Development Bank, Research Department.
  10. de Sousa, José & Mayer, Thierry & Zignago, Soledad, 2012. "Market Access in Global and Regional Trade," CEPR Discussion Papers 9085, C.E.P.R. Discussion Papers.
  11. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2011. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," NBER Working Papers 16975, National Bureau of Economic Research, Inc.
  12. Yeaple, Stephen Ross, 2009. "Firm heterogeneity and the structure of U.S. multinational activity," Journal of International Economics, Elsevier, vol. 78(2), pages 206-215, July.
  13. repec:ner:tilbur:urn:nbn:nl:ui:12-3125515 is not listed on IDEAS
  14. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  15. Andreas Hoefele & Tim Schmidt-Eisenlohr & Zhihong Yu, 2013. "Payment Choice in International Trade: Theory and Evidence from Cross-country Firm Level Data," CESifo Working Paper Series 4350, CESifo Group Munich.
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