Broken relationships : De-risking by correspondent banks and international trade
Borchert, Lea; De Haas, Ralph; Kirschenmann, Karolin; Schultz, Alison (16.10.2024)
Numero
10/2024Julkaisija
Bank of Finland
2024
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2024101680576Tiivistelmä
We study how terminated correspondent banking relationships affect international trade. Drawing on firm-level export data from emerging Europe, we show that when local banks lose access to correspondent services, their corporate clients experience significant export declines. This trade contraction occurs on both the extensive margin, with fewer firms exporting, and the intensive margin, with existing exporters shipping lower values. Firms only partially offset lost exports with higher domestic sales, resulting in lower total revenues and employment. Other firms cease operations entirely. These firmlevel impacts aggregate to lower industry-level exports in countries more exposed to correspondent bank retrenchment.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
Global banking has changed substantially in the wake of the global financial crisis, as new regulation, stricter supervision, and stronger risk management prompted international banks to scale back foreign activities. A prime example of this retrenchment is the sharp decline in correspondent banking. Correspondent banks allow local banks to access the international payments system and thus help them to make cross-border payments, clear currencies, and provide trade finance. In this paper, we examine how the correspondent bank retrenchment affects firm-level exports, domestic revenues, employment, and survival probabilities.
CONTRIBUTION
To identify the impact of the withdrawal of correspondent banks on firm activity, we join three key pieces of information: time-varying data on individual respondent banks’ lost correspondent relationships, information on the identity of the corporate customers of these banks, and data on exports and other relevant outcomes of these firms. We also assess which firms are affected most by the withdrawal of correspondent banks, whether there are within-industry spillover effects and whether the firm-level results aggregate to the industry-level.
FINDINGS
We find that the decline in the supply of correspondent banking services negatively affects both the extensive and the intensive export margins. Some affected firms can compensate for the export decline by boosting domestic sales. However, many other firms experience a decrease in total revenues, lay off employees, or go out of business entirely. These negative outcomes of the decline in correspondent banking are most pronounced among smaller and younger firms. Sector-level results confirm our firm-level evidence: the export growth rate is significantly lower in countries with a high withdrawal in correspondent banking than in countries where no or only few correspondent banks left.
FOCUS
Global banking has changed substantially in the wake of the global financial crisis, as new regulation, stricter supervision, and stronger risk management prompted international banks to scale back foreign activities. A prime example of this retrenchment is the sharp decline in correspondent banking. Correspondent banks allow local banks to access the international payments system and thus help them to make cross-border payments, clear currencies, and provide trade finance. In this paper, we examine how the correspondent bank retrenchment affects firm-level exports, domestic revenues, employment, and survival probabilities.
CONTRIBUTION
To identify the impact of the withdrawal of correspondent banks on firm activity, we join three key pieces of information: time-varying data on individual respondent banks’ lost correspondent relationships, information on the identity of the corporate customers of these banks, and data on exports and other relevant outcomes of these firms. We also assess which firms are affected most by the withdrawal of correspondent banks, whether there are within-industry spillover effects and whether the firm-level results aggregate to the industry-level.
FINDINGS
We find that the decline in the supply of correspondent banking services negatively affects both the extensive and the intensive export margins. Some affected firms can compensate for the export decline by boosting domestic sales. However, many other firms experience a decrease in total revenues, lay off employees, or go out of business entirely. These negative outcomes of the decline in correspondent banking are most pronounced among smaller and younger firms. Sector-level results confirm our firm-level evidence: the export growth rate is significantly lower in countries with a high withdrawal in correspondent banking than in countries where no or only few correspondent banks left.