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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
International Trade Risk and the Role of Banks
Friederike Niepmann
Tim Schmidt-Eisenlohr
Abstract

International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. This paper explores under which conditions and to what extent firms use these products. We find that letters of credit and documentary collections cover about 10 percent of U.S. exports and are preferred for larger transactions, indicating substantial fixed costs. Letters of credit are employed the most for exports to countries with intermediate contract enforcement. Compared to documentary collections, they are used for riskier destinations. We provide a model that rationalizes these empirical findings and discuss implications.


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Friederike Niepmann & Tim Schmidt-Eisenlohr, International Trade Risk and the Role of Banks, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1151, 16 Nov 2015.
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Keywords: Trade finance; multinational banks; risk; letter of credit
DOI: 10.17016/IFDP.2015.1151
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