The Role of Foreign Banks in Trade

23 September 2015
12:30  - 13:30

Stijn Claessens, Board of Governors of the Federal Reserve System

 

 

Abstract

This paper provides evidence that foreign banks through their “brick and mortar” operations play an important role in facilitating trade. Combining data on bilateral, sectoral trade with bilateral data on foreign bank presence for 95 exporting and 122 importing countries for the period 1995-2007, we show that, controlling for the impact of domestic financial development, local presence of foreign banks, especially from the importing country, is associated with higher exports in sectors more dependent on external finance. Furthermore, the entry of a bank from an importing country boosts bilateral exports disproportionately more in external finance dependent sectors, especially when banks active in trade finance enter countries with relative low financial development and weak informational environments. Our findings are consistent with foreign banks facilitating trade over and beyond what domestic banks do through external financing and (transfer of) specialized knowledge and technology, with important real economic benefits.

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