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Risk-Based Capital Requirements for Banks and International Trade

61 Pages Posted: 29 Oct 2014 Last revised: 4 Nov 2014

Banu Demir

Bilkent University

Tomasz Kamil Michalski

HEC Paris - Economics & Decision Sciences

Evren Ors

HEC Paris - Finance Department

Date Written: October 28, 2014

Abstract

We provide the first evidence that changes in risk-based capital requirements for banks affect the real economy through international trade. Using a natural experiment – mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012 – we investigate the impact of new risk-weights applied to commercial letters of credit (CLC) on that country’s exports to 174 countries. We estimate the resulting payment-term-cost elasticity of CLC-financed trade to be between -0.5 and -1 while the overall trade elasticity to be between -0.032 and -0.179. Calculations suggest that both CLC-related bank pricing and rationing channels are involved.

Keywords: commercial letters of credit; international trade finance; exports; risk-weights; Basel II

JEL Classification: G21; G28; F14

Suggested Citation

Demir, Banu and Michalski, Tomasz Kamil and Ors, Evren, Risk-Based Capital Requirements for Banks and International Trade (October 28, 2014). HEC Paris Research Paper No. FIN-2014-1064. Available at SSRN: https://ssrn.com/abstract=2515964 or http://dx.doi.org/10.2139/ssrn.2515964

Banu Demir

Bilkent University ( email )

Bilkent, Ankara 06533
Turkey

Tomasz K. Michalski

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Evren Ors (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7123 (Phone)
+33 1 3967 7085 (Fax)

HOME PAGE: http://www.hec.fr/ors

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