2013-14 | February 2016
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Bank Linkages and International Trade
We uncover a new channel through which international finance is related to international trade: 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 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. We conjecture that the mechanism for this effect is the role bank linkages play in reducing export risk and present six sets of results 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 with more differentiated goods, i.e. industries which tend to be subject to more export risk. Moreover, for U.S. banks , we can show that bank linkages are positively associated with foreign letter of credit exposures. Finally, we find that the formation of new bank linkages creates trade diversions from countries competing for similar imports.
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