Bank linkages and international trade

Abstract

This paper shows that bank linkages have a positive effect on international trade. A global banking network (GBN) is constructed at the bank level, using individual syndicated loan data from Loan Analytics for 1990-2007. Network distance between bank pairs is computed and aggregated to country pairs as a measure of bank linkages between countries. Data on bilateral trade from IMF DOTS are used as the subject of the analysis and data on bilateral bank lending from BIS locational data are used to control for financial integration and financial flows. Using a gravity approach to modeling trade with country-pair and year fixed effects, the paper finds that new connections between banks in a given country-pair lead to an increase in trade flow in the following year, even after controlling for the stock and flow of bank lending between the two countries. It is conjectured that the mechanism for this effect is that bank linkages reduce export risk, and four sets of results that support this conjecture are presented.

Financial intermediation, trade agreements and international trade*

“…Finally, in line with Schmidt‐Eisenlohr (2013), Fauceglia (2015), Niepmann and Schmidt‐Eisenlohr (2017) and Caballero et al. (2018), these results show that financial intermediation in the importing country matters for international trade. They also corroborate H3, which states that the existence of an RTA between two trading partners mitigates the favourable impact of financial intermediation in the destination country.…”

Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects

“…An important question raised by our baseline analysis is whether our results might be confounded by real linkages across countries. For instance, if financial linkages in general, and interbank lending in particular, are highly correlated with bilateral trade flows (Caballero, Candelaria and Hale, 2018), then crises may transmit across borders through a real (rather than financial) channel. In addition, many global banks have extensive subsidiary and branch networks around the world (Claessens and van Horen, 2014), which makes them susceptible to a loss of franchise value when foreign markets experience crises.…”

Cross-Border Interbank Contagion Risk Analysis

“…For instance, through efficient allocation of global funds, it supports output growth of the less developed countries. A higher level of bank linkages can also promote international trade as the banking sector becomes more effective and plays an important role as a financial intermediary for firms that produce tradable goods (Caballero, Candelaria, and Hale, 2018).…”