International Finance Discussion Papers (IFDP)
No Guarantees, No Trade: How Banks Affect Export Patterns
Friederike Niepmann and Tim Schmidt-Eisenlohr
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, letter of credit, exports, financial shocks
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