International Trade Risk and the Role of Banks

Friederike Niepmann and Tim Schmidt-Eisenlohr

No 1151, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. This paper explores under which conditions and to what extent firms use these products. We find that letters of credit and documentary collections cover about 10 percent of U.S. exports and are preferred for larger transactions, indicating substantial fixed costs. Letters of credit are employed the most for exports to countries with intermediate contract enforcement. Compared to documentary collections, they are used for riskier destinations. We provide a model that rationalizes these empirical findings and discuss implications.

Keywords: Trade finance; multinational banks; risk; letters of credit (search for similar items in EconPapers)
JEL-codes: F21 F23 F34 G21 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2015-11-16
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (7)

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http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1151.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/IFDP.2015.1151 DOI (application/pdf)

Related works:
Journal Article: International trade, risk and the role of banks (2017)
Working Paper: International Trade, Risk and the Role of Banks (2014)
Working Paper: International Trade, Risk and the Role of Banks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1151

DOI: 10.17016/IFDP.2015.1151

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