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.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This study provides evidence that shocks to the supply of trade finance have a causal effect on U.S. exports. The identification strategy exploits variation in the importance of banks as providers of letters of credit across countries. The larger a U.S. bank's share of the trade finance market in a country is, the larger should be the effect on exports to that country if the bank reduces its supply of letters of credit. We find that supply shocks have quantitatively significant effects on export growth. A shock of one standard deviation to a country's supply of trade finance decreases exports, on average, by 2 percentage points. The effect is much larger for exports to small and risky destinations and in times when aggregate uncertainty is high. Our results imply that global banks affect export patterns and suggest that trade finance played a role in the Great Trade Collapse. JEL-Code: F210, F230, F340, G210. Terms of use: Documents in

2 countries. Our methodology largely follows that described in Buch and Goldberg (2016) and is part of the joint research effort of the IBRN on cross-border prudential policy spillovers. 2 Our first specifications test whether U.S. global banks and U.S. branches and subsidiaries of foreign banks adjust their lending in response to foreign prudential instrument changes. We find statistically significant effects for 3 instruments: capital requirements, local currency reserve requirements, and limits on loan-to-value (LTV) ratios. The tightening of prudential instruments abroad increases loan growth in the United States. Higher foreign country capital requirements abroad mainly affect U.S. loan growth through U.S. global banks, while higher local currency reserve requirements and limits on LTV ratios mainly transmit through the lending of the U.S. branches and subsidiaries of foreign banks. Our second set of tests investigates whether U.S. global banks' exposures in foreign countries react to prudential instrument changes there. The evidence is weaker in this case. Foreign changes in prudential instruments have a weak and mostly insignificant effect on U.S. banks' claims on residents in the country where the change occurs. Lastly, we explore whether changes in U.S. prudential instruments have effects across borders. While foreign economies have used a combination of both cyclical and structural instruments, U.S. policymakers have favored structural regulations that are less correlated with the financial cycle and are not changed frequently (Elliott, Feldberg, and Lehnert, 2013). As a result, the only U.S. instrument change recorded in the IBRN Prudential Instruments Database is related to the introduction of the Basel 2.5 capital regulations in 2013q1. Our results indicate that after this change the largest U.S. banks, those that are required to participate on annual stress tests or follow the Advanced Approaches capital framework, reduced their foreign lending growth relative to the smaller banks. 3 2 The following studies are part of the IBRN study on the impact of prudential instrument changes on the activities of global banks: