International Finance Discussion Papers (IFDP)

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February 2016

No Guarantees, No Trade: How Banks Affect Export Patterns

Friederike Niepmann and Tim Schmidt-Eisenlohr

Abstract:

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

DOI: http://dx.doi.org/10.17016/IFDP.2016.1158

PDF: Full Paper

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Last Update: June 19, 2020