International Trade, Risk and the Role of Banks

By Friederike Niepmann, Tim Schmidt-Eisenlohr. Social Science Research Network, 2017

162 citations recorded by the source corpus.

Banks play a critical role in international trade by providing trade finance products that reduce the risk of exporting. This paper employs two new data sets to shed light on the magnitude and structure of this business, which, as we show, is highly concentrated in a few large banks. The two principal trade finance instruments, letters of credit and documentary collections, covered about 10 percent of U.S. exports in 2012. They are preferred for larger transactions, which indicates the existence of substantial fixed costs in the provision and use of these instruments. Letters of credit are employed the most for exports to countries with intermediate degrees of contract enforcement. Compared to documentary collections, they are used for riskier destinations. We provide a model of payment contract choice that rationalizes these empirical findings and discuss implications for the ongoing provision of trade finance.

Subfields: Accounting, Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/21baa906858a67ffa453471d3da8d046d50aa0b7

Citations in the corpus

• International Trade, Multinational Activity, and Corporate Finance (2015, unknown): “Exploiting the cross-bank variation in country focus, Niepmann & Schmidt-Eisenlohr (2014b) show that destination-specific decreases in the supply of letters of credit reduce bilateral exports.”