No Guarantees, No Trade: How Banks Affect Export Patterns

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.

Keywords: trade finance, global banks, letters of credit, exports, financial shocks

JEL Classification: F21, F23, F34, G21

Suggested Citation: Suggested Citation

Niepmann, Friederike and Schmidt-Eisenlohr, Tim, No Guarantees, No Trade: How Banks Affect Export Patterns (February, 2016). International Finance Discussion Paper No. 1158, Available at SSRN: https://ssrn.com/abstract=2731067 or http://dx.doi.org/10.17016/IFDP.2016.1158