International trade, risk and the role of banks

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.

Evolving Patterns of Payment Methods in Turkish Foreign Trade

“…Their results further suggest that the use of post shipment method (OA) increases as the relationship between trading partners develops. In addition to the aforementioned studies, some studies have explicitly dealt with only one method of payment in great detail, namely L/C (see Glady and Potin, 2011;Ahn, 2011Ahn, , 2013Olsen, 2013;and Niepmann and Schmidt-Eisenlohr, 2013).…”

No Guarantees, No Trade: How Banks Affect Export Patterns

“…Niepmann and Schmidt-Eisenlohr (2013) and Del Prete and Federico (2014) present details on the market structure for the U.S. and Italy, respectively. In 2012, the top 5 banks accounted for 92 percent of all trade finance claims in the U.S.…”

“…5 These data were first used in Niepmann and Schmidt-Eisenlohr (2013). 6 We modify and add several elements to the approach.…”

Investigating the Role of Contract Enforcement and Financial Costs on the Payment Choice: Industry-Level Evidence from Turkey

“…The main novelty in this paper is the fact that the 6 Trade finance performs four basic functions in facilitating international transactions: financing, risk mitigation, payment facilitation, and the provision of information about the status of payments or shipment (ITC, 2009). 7 Several recent studies have analyzed the choice between different payment modes including Glady and Potin (2011), Ahn (2011), Mateui (2012, , Antras and Foley (2013), Olsen (2013) and Niepmann and Schmidt-Eisenlohr (2013). 8 See for example ICC (2009), Malouche, (2009a and IMF-BAFT (2009). formal model predicts the financial and legal conditions in both the source and the destination country as the determinants of the cross country difference in trade finance…”

“…12,13 With respect to the extensive margin, the Exporter Dynamics Database of the World Bank shows that the number of exporting firms increased from 30,000 to 48,000 and the number of exporters per export destination increased from 500 to 1000 between 2002 and 2010. 14 The number of export markets with an export volume over 1 billion USD increased from 5 in 2000 to more 9 In addition to the aforementioned studies, some works have explicitly dealt with only one method of payment in great detail, namely L/C (see Glady and Potin, 2011;Niepmann and Schmidt-Eisenlohr, 2013). 10 Very few countries (e.g.…”