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Bank linkages and international trade

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  • Caballero, Julian
  • Candelaria, Christopher
  • Hale, Galina
Abstract
We uncover a new channel through which international finance is related to trade: the formation of international bank linkages increases exports. Bank linkages are measured for each pair of countries in each year as a number of bank pairs in these two countries that are connected through cross-border syndicated lending. Using a gravity approach to model trade for 66 countries over 24 years with a full set of fixed effects (source-year, target-year, source-target), we find that new connections between banks in a given country-pair lead to an increase in trade flows between these countries in the following year and to trade diversions from countries competing for similar imports. We conjecture that the mechanism for this effect is the role bank linkages play in reducing export risk and present evidence supporting this conjecture. In particular, using industry-level trade data and controlling for country-pair-year and industry fixed effects, we find that new bank linkages have larger impacts on trade in industries which tend to be subject to more export risk. For U.S. banks, we can show that bank linkages are positively associated with foreign letter of credit exposures.

Suggested Citation

  • Caballero, Julian & Candelaria, Christopher & Hale, Galina, 2018. "Bank linkages and international trade," Journal of International Economics, Elsevier, vol. 115(C), pages 30-47.
    • Handle: RePEc:eee:inecon:v:115:y:2018:i:c:p:30-47
    DOI: 10.1016/j.jinteco.2018.08.006
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    More about this item

    Keywords

    Financial networks; International Banking; International trade; Gravity; Export risk;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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