International Trade, Risk and the Role of Banks

Friederike Niepmann and Tim Schmidt-Eisenlohr

No 633, Staff Reports from Federal Reserve Bank of New York

Abstract: 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 we discuss implications for the ongoing provision of trade finance.

Keywords: letters of credit; multinational banks; risk; trade finance (search for similar items in EconPapers)
JEL-codes: F21 F23 F34 G21 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2013-09-01
New Economics Papers: this item is included in nep-ban and nep-opm
Note: Previous title: “Banks in International Trade Finance: Evidence from the U.S.”
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: International trade, risk and the role of banks (2017)
Working Paper: International Trade Risk and the Role of Banks (2015)
Working Paper: International Trade, Risk and the Role of Banks (2014)
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