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No Guarantees, No Trade: How Banks Affect Export Patterns

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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. We show that a one-standard deviation negative shock to a country's supply of letters of credit reduces U.S. exports to that country 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.

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  • Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2016. "No Guarantees, No Trade: How Banks Affect Export Patterns," International Finance Discussion Papers 1158, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1158
    DOI: 10.17016/IFDP.2016.1158
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    Cited by:

    1. Janet Koech & Mark A. Wynne, 2017. "Diversification and Specialization of U.S. States," The Review of Regional Studies, Southern Regional Science Association, vol. 47(1), pages 63-91, Winter.
    2. Claessens, Stijn & Hassib, Omar & Van Horen, Neeltje, 2017. "The Role of Foreign Banks in Trade," CEPR Discussion Papers 11821, C.E.P.R. Discussion Papers.
    3. Goldbach, Stefan & Nitsch, Volker, 2015. "Cutting the credit line: Evidence from Germany," Discussion Papers 25/2015, Deutsche Bundesbank.
    4. Aleksejs Krecetovs & Pasquale Della Corte, 2016. "Macro uncertainty and currency premia," 2016 Meeting Papers 624, Society for Economic Dynamics.
    5. Ines Buono & Sara Formai, 2016. "The heterogeneous response of domestic sales and exports to bank credit shocks," Temi di discussione (Economic working papers) 1066, Bank of Italy, Economic Research and International Relations Area.
    6. Matthieu Crozet & Julian Hinz, 2016. "Collateral Damage: The impact of the Russia sanctions on sanctioning countries’ exports," Working Papers 2016-16, CEPII research center.
    7. C. Fritz Foley & Kalina Manova, 2015. "International Trade, Multinational Activity, and Corporate Finance," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 119-146, August.
    8. Steven Poelhekke, 2016. "Financial globalization and foreign direct investment," DNB Working Papers 527, Netherlands Central Bank, Research Department.
    9. Koen van der Veer, 2015. "Loss shocks and the quantity and price of private export credit insurance: Evidence from a global insurer," DNB Working Papers 462, Netherlands Central Bank, Research Department.
    10. Crozet, Matthieu & Hinz, Julian, 2016. "Friendly fire - the trade impact of the Russia sanctions and counter-sanctions," Kiel Working Papers 2059, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    trade finance; global banks; letter of credit; exports; financial shocks;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • 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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