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International Trade Risk and the Role of Banks

Author

Listed:
  • Tim Schmidt-Eisenlohr
  • Friederike Niepmann

Abstract

International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. This paper explores under which conditions and to what extent firms use these products. We find that letters of credit and documentary collections cover about 10 percent of U.S. exports and are preferred for larger transactions, indicating substantial fixed costs. Letters of credit are employed the most for exports to countries with intermediate contract enforcement. Compared to documentary collections, they are used for riskier destinations. We provide a model that rationalizes these empirical findings and discuss implications.

Suggested Citation

  • Tim Schmidt-Eisenlohr & Friederike Niepmann, 2015. "International Trade Risk and the Role of Banks," International Finance Discussion Papers 1151, Board of Governors of the Federal Reserve System (U.S.), revised 16 Nov 2015.
  • Handle: RePEc:fip:fedgif:1151
    DOI: 10.17016/IFDP.2015.1151
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Trade finance; risk; multinational banks; letter of credit;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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