The Role of Foreign Banks in Trade The Role of Foreign Banks in Trade Stijn Claessens (Federal...

The Role of Foreign Banks in Trade

Stijn Claessens (Federal Reserve Board and CEPR)

Omar Hassib (Maastricht University)

Neeltje van Horen (De Nederlandsche Bank and CEPR)

Conference "FINANCE, CAPITAL REALLOCATION AND

GROWTH"23-24 October 2015, St. Gallen

Disclaimer: This presentation represents our own views and not necessarily those of the Federal Reserve Board of Governors, De Nederlandsche Bank, the Eurosystem, or their staff.

Motivation

Global financial crisis led to a focus on understanding the risks of internationally active banks

Here focus on potentially important benefit: the role of foreign banks in financing international trade

Specifically, examine whether the local presence of foreign banks (i.e., “brick and mortar” operations) boosts exports

Main take-away

Foreign banks do facilitate trade Especially when from importing country Especially when global banks active in trade finance invest in

(financially) less developed countries

Suggests foreign banks have important benefits for real economy

Why does finance matter (esp.) for trade?

Substantial upfront fixed costs, investments → external financing needs

Long time lags associated with international trade imply high(er) need for working capital financing

Exporters have limited capacity to evaluate (default) risks and turn to banks for payment insurance and guarantees

Ample empirical evidence that finance facilitates trade But still open question whether type of bank (domestic or

foreign) matters

Why could foreign banks matter for trade?

Foreign banks can improve access to finance Direct: can access (additional) funding through parent banks

Indirect: introduce new, better technologies and increase competition increases quality and reduces the costs of financial intermediation

Caveat: for certain firms and in certain countries

This should especially benefit firms that (want to) trade

Why could foreign banks matter for trade?

Can reduce risks specific to firms that trade Better able to deal with enforcement of international contracts and

provide additional insurance

Better able to assess risk at both sides of the transaction (importer and exporter) as it suffers less from asymmetric information

Especially foreign banks from importing country

Increases willingness to lend to firms that trade

Why could foreign banks matter for trade?

Economies of scale in trade finance: specialized business, mostly done by large, globally active banks, with networks

Specialized products (i.e., letters of credit), hedging currency risk

Expect local affiliates of these banks to have advantages providing trade-related financial products to existing and new firms

Especially compared to domestic banks in less developed countries

Hypothesis & approach

Does the presence of foreign banks have a positive impact on export over and above general financial sector development?

Especially benefit sectors with high need of external finance?

Additionally: Do effects vary by home and exporting country?; and Do some foreign banks help more?

Combine detailed data on bilateral, sectoral trade with bilateral data on foreign bank presence across 95 exporting and 122 importing countries between 1995 and 2007

Two approaches: panel and event study

Exploit two important facts

1. Foreign bank presence varies importantly over time and across countries

2. Little relationship between financial sector development and presence of foreign banks

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 10

0.5

1

1.5

2

2.5

3

Foreign bank assets/Total bank assets

Pri

vate

cre

dit/

GD

P

Preview of findings

Panel analysis: Positive relationship between share of foreign banks and exports in sectors more dependent on external finance (controlling for financial development)

Impact stronger for foreign banks from importing country

Event study: Entry of a foreign bank from the importing country boosts bilateral exports more in sectors more dependent on external finance

Impact especially strong when banks active in trade finance invest in underdeveloped countries

Indicates that (transfer of) specialized knowledge and technology for trade financing is important

Literature

Three sets of related literature

1) Impact of foreign banks Claessens, Demirguc-Kunt & Huizinga, 2001; Clarke, Cull, Martinez Peria & Sanches, 2003; Demirguc-Kunt, Laeven & Levine, 2004; Detragiache, Gupta & Tressel, 2008; Bruno & Hauswald, 2013; Claessens & Van Horen, 2014

Our paper: presence of foreign banks has beneficial impact on real economy by facilitating trade, but country characteristics matter

2) Trade and financeKletzer & Bardhan, 1987; Beck, 2002, 2003; Greenaway, Guariglia & Kneller, 2007; Manova, 2008, 2013; Berman & Hericourt, 2010; Minetti and Zhu, 2011; Becker, Chen & Greenberg, 2013; Hale, Candelaria, Caballero & Borisov, 2013; Bronzini & D’Ignazio, 2013

Our paper: the type of bank (foreign or domestic owned) matters importantly

3) Finance and growthKing and Levine, 1993; Jayaratne & Strahan 1996; Demirguc-Kunt & Maksimovic, 1998, Levine & Zervos, 1998; Rajan & Zingales, 1998; Michalski & Ors, 2012

Our paper: global financial integration, through local presence of foreign banks, can generate economic growth by facilitating international trade

Data

Data

We need to combine several data sources Sectoral, bilateral trade data Sectoral data on external finance dependency Bilateral data on foreign bank presence

Trade & industry data

Bilateral trade flows at sectoral level (UN Comtrade) 134 countries 28 manufacturing sectors (3-digit ISIC industry level) 1995-2007 (excluding global financial crisis)

Differentiate between sectors with (intrinsic) high and low need for external finance

External finance dependency: fraction of total capital expenditure not financed by internal cash flows (Rajan and Zingales, 1998)

Based on data for all publicly-listed US companies available in Compustat averaged over 1986-1995 (Manova, 2013)

Foreign bank data

Bank ownership database (Claessens and Van Horen, 2014): Ownership information of 5,324 banks active for at least one year over

1995-2009 in 137 countries Bank foreign owned if > 50% shares held by foreigners If foreign, know home country of majority foreign shareholder Data matched to Bankscope for balance sheet information

Excluding offshore centers and countries with <60% banks asset info available: 95 exporting and 122 importing countries

Foreign bank data

Bank ownership database has two important features:1) Ownership information is time-varying

• Know the importance of foreign banks in financial intermediation for each year in sample period

• Exploit in panel analysis

2) For each foreign bank the country in which the parent is headquartered is known• Know exact year when bank from importing country for first time

entered exporting country• Exploit in event study and to examine channels through which

foreign banks facilitate trade

Some numbers

Trade (2007) On average country exports to over 70 countries when exporting in

sector Average bilateral export: 1.6 billion USD (median 76 million USD) In 53% of sector-pairs trade takes place

Foreign banks (2007) 1,043 foreign banks headquartered in 77 different home countries Importance foreign banks ranges from 0 to 100 percent On average, 11 foreign banks from 6 different home countries In 78 percent of exporting-importing pairs at least one foreign bank

present; in 6 percent bank from importing country Number of entries per exporting country ranges from 0 to 39, average 7

The role of foreign banks in trade: panel analysis

Panel analysis

Aim: to examine whether a higher presence of foreign banks is associated with a higher level of exports

Identification: allow the impact of foreign bank presence to differ with respect to sector dependency on external finance

Control for all time-(in)variant exporting country characteristics that can simultaneously influence foreign bank presence and exports

Dependent & main explanatory variables

Dependent variable: log of value of exports from country i to country j in 3-digit ISIC sector s

in year t

Foreign bank presence (FBi,t): Asset share of all foreign banks active in exporting country i at time t

(preferred, but only available 2005-2007) Dummy if at least one foreign bank present in country i at time t Share in numbers

Importing country foreign bank presence (IFBi,j,t): Same as above, but only banks from importing country included

Control variables & methodology

Control variables: Financial development (private credit/GDP) interacted with sectoral

external finance dependency Fixed effects: exporter-year, importer-year and industry Distance between exporter and importer country

OLS, standard errors clustered by exporter-importer pair

Empirical model

𝑙𝑛𝐸 𝑖𝑗𝑠𝑡=𝛽1𝐹𝐵𝑖𝑡 ∙𝑒𝑥𝑡𝑓𝑖𝑛𝑠+𝛾 1 𝐼 𝐹𝐵𝑖 𝑗 𝑡 ∙𝑒𝑥𝑡𝑓𝑖𝑛𝑠+𝛾2 𝐼 𝐹𝐵𝑖 𝑗 𝑡+𝛿1𝐹𝐷 𝑖𝑡 ∙𝑒𝑥𝑡𝑓𝑖𝑛𝑠+𝜅′ 𝑋 𝑡+𝜖 𝑖𝑡+𝜇 𝑗𝑡+𝜑 𝑠+𝜂𝑖𝑗𝑠𝑡 ,

Baseline results

  1995-2007 2005-2007   1995-2007 2005-2007

dummy number share asset share dummy number share asset share  [1] [2] [3]   [4] [5] [6]

FB * extfin 0.181*** 0.111* 0.730***   0.178*** 0.098 0.724***

(0.052) (0.067) (0.062) (0.052) (0.068) (0.063)

IFB * extfin 0.200*** 2.816*** 1.298***

(0.054) (0.621) (0.392)

IFB 0.520*** 5.519*** 2.859***

(0.056) (0.658) (0.544)

FD * extfin 1.732*** 1.736*** 1.679*** 1.733*** 1.741*** 1.678***

(0.028) (0.028) (0.035) (0.028) (0.028) (0.035)

Distance -1.712*** -1.712*** -1.838*** -1.667*** -1.679*** -1.817***

(0.023) (0.023) (0.026) (0.023) (0.023) (0.026)

Fixed effects Exporter-year, importer-year and industry

Obs 1,726,604 1,726,604 476,551 1,726,604 1,726,604 473,162

R2 0.559 0.559 0.575   0.561 0.561 0.575

Baseline results

  1995-2007 2005-2007   1995-2007 2005-2007

dummy number share asset share dummy number share asset share  [1] [2] [3]   [4] [5] [6]

FB * extfin 0.181*** 0.111* 0.730***   0.178*** 0.098 0.724***

(0.052) (0.067) (0.062) (0.052) (0.068) (0.063)

IFB * extfin 0.200*** 2.816*** 1.298***

(0.054) (0.621) (0.392)

IFB 0.520*** 5.519*** 2.859***

(0.056) (0.658) (0.544)

FD * extfin 1.732*** 1.736*** 1.679*** 1.733*** 1.741*** 1.678***

(0.028) (0.028) (0.035) (0.028) (0.028) (0.035)

Distance -1.712*** -1.712*** -1.838*** -1.667*** -1.679*** -1.817***

(0.023) (0.023) (0.026) (0.023) (0.023) (0.026)

Fixed effects Exporter-year, importer-year and industry

Obs 1,726,604 1,726,604 476,551 1,726,604 1,726,604 473,162

R2 0.559 0.559 0.575   0.561 0.561 0.575

Countries with higher share of foreign banks export relatively more in sectors more dependent on external finance

Results

  1995-2007 2005-2007   1995-2007 2005-2007

dummy number share asset share dummy number share asset share  [1] [2] [3]   [4] [5] [6]

FB * extfin 0.181*** 0.111* 0.730***   0.178*** 0.098 0.724***

(0.052) (0.067) (0.062) (0.052) (0.068) (0.063)

IFB * extfin 0.200*** 2.816*** 1.298***

(0.054) (0.621) (0.392)

IFB 0.520*** 5.519*** 2.859***

(0.056) (0.658) (0.544)

FD * extfin 1.732*** 1.736*** 1.679*** 1.733*** 1.741*** 1.678***

(0.028) (0.028) (0.035) (0.028) (0.028) (0.035)

Distance -1.712*** -1.712*** -1.838*** -1.667*** -1.679*** -1.817***

(0.023) (0.023) (0.026) (0.023) (0.023) (0.026)

Fixed effects Exporter-year, importer-year and industry

Obs 1,726,604 1,726,604 476,551 1,726,604 1,726,604 473,162

R2 0.559 0.559 0.575   0.561 0.561 0.575

Stronger impact when foreign banks headquartered in importing country

Results

  1995-2007 2005-2007   1995-2007 2005-2007

dummy number share asset share dummy number share asset share  [1] [2] [3]   [4] [5] [6]

FB * extfin 0.181*** 0.111* 0.730***   0.178*** 0.098 0.724***

(0.052) (0.067) (0.062) (0.052) (0.068) (0.063)

IFB * extfin 0.200*** 2.816*** 1.298***

(0.054) (0.621) (0.392)

IFB 0.520*** 5.519*** 2.859***

(0.056) (0.658) (0.544)

FD * extfin 1.732*** 1.736*** 1.679*** 1.733*** 1.741*** 1.678***

(0.028) (0.028) (0.035) (0.028) (0.028) (0.035)

Distance -1.712*** -1.712*** -1.838*** -1.667*** -1.679*** -1.817***

(0.023) (0.023) (0.026) (0.023) (0.023) (0.026)

Fixed effects Exporter-year, importer-year and industry

Obs 1,726,604 1,726,604 476,551 1,726,604 1,726,604 473,162

R2 0.559 0.559 0.575   0.561 0.561 0.575

And importantly: effects over and above the impact of domestic financial development

Economic significance

  1995-2007 2005-2007   1995-2007 2005-2007

dummy number share asset share dummy number share asset share  [1] [2] [3]   [4] [5] [6]

FB * extfin 0.181*** 0.111* 0.730***   0.178*** 0.098 0.724***

(0.052) (0.067) (0.062) (0.052) (0.068) (0.063)

IFB * extfin 0.200*** 2.816*** 1.298***

(0.054) (0.621) (0.392)

IFB 0.520*** 5.519*** 2.859***

(0.056) (0.658) (0.544)

FD * extfin 1.732*** 1.736*** 1.679*** 1.733*** 1.741*** 1.678***

(0.028) (0.028) (0.035) (0.028) (0.028) (0.035)

Distance -1.712*** -1.712*** -1.838*** -1.667*** -1.679*** -1.817***

(0.023) (0.023) (0.026) (0.023) (0.023) (0.026)

Fixed effects Exporter-year, importer-year and industry

Obs 1,726,604 1,726,604 476,551 1,726,604 1,726,604 473,162

R2 0.559 0.559 0.575   0.561 0.561 0.575

One std. dev increase in FB implies exports at 75th percentile of external finance dependency are 7.3 pp higher than in sector at 25th percentile

For IFB: 9.1 pp Comparison: for FD 29.4 pp

Robustness tests

Adding importer-year-industry etc. fixed effects: To control for sectoral differences in competitiveness and demand at

the importer, exporter level that may affect export performance

Adding bilateral and bilateral-year fixed effects To control for any residual bilateral variations that affect exports

Control for other country characteristics that can interact with sectoral characteristics to affect exports:

Corruption and rule of law Country factor endowments (human capital, physical capital and

natural resources)

Control for other financial linkages: Stock of FDI and cross-border liabilities (interacted) Make sure not picking up other types of financial integration

Robustness tests

Control for domestic output (at sector level): To make sure our results are not picking up an increase in domestic

production but really a scaling-up of exports

Cluster by exporter-industry: Errors might be correlated within the exporting country and

specifically within each sector in each country. Make sure results not affected by specific choice of clustering

Studying extensive margin: Probit using dummy whether there is export from country i to

country j in sector s at time t Studying intensive plus extensive margin:

Poisson using value of exports from country i to country j in sector s at time t (keep zeros: combine extensive and intensive margins)

Robustness of baseline results

Importer * year * industry FE Pair FE Institutions

Factor endowments

Financial integration

Domestic production

Cluster by exporter-industry

Extensive margin

Intensive and extensive margin

[2] [3] [4] [5] [6] [7] [8] [9] [10]

FB * extfin 0.776*** 0.824*** 0.236*** 0.506*** 0.602*** 0.488*** 0.724*** 0.216*** 1.079***

(0.062) (0.061) (0.063) (0.064) (0.075) (0.068) (0.252) (0.0263) (0.289)

IFB * extfin 0.883** 0.667* 1.568*** 1.311*** 1.369*** 0.756 1.298** 1.962*** 1.813

(0.401) (0.386) (0.353) (0.403) (0.390) (0.527) (0.553) (0.669) (1.230)

IFB 3.027*** 2.783*** 2.472*** 2.766*** 2.611*** 2.859*** 2.823*** 0.818

(0.547) (0.523) (0.534) (0.545) (0.535) (0.241) (0.383) (0.510)

FD * extfin 1.668*** 1.617*** 0.452*** 1.472*** 1.596*** 1.132*** 1.678*** 0.753*** 0.854***

(0.035) (0.035) (0.055) (0.036) (0.040) (0.037) (0.155) (0.0228) (0.151)

Distance -1.835*** -1.820*** -1.820*** -1.815*** -1.844*** -1.817*** -0.962*** -0.954***

(0.027) (0.026) (0.027) (0.027) (0.030) (0.019) (0.0169) (0.0322)

Corruption * extfin -0.316***

(0.063)

Rule of law * extfin 1.203***

(0.070)

Human capital * 1.857***

industry H intensity (0.074)

Physical capital * -0.371

industry K intensity (0.244)

Natural resources * 0.034***

industry N intensity (0.002)

FDI * extfin 0.178***

(0.000)

Cross-border * extfin -0.027

(0.032)

Domestic production 0.417***

(0.010)

Fixed effects

Obs 473,162 473,162 473,162 456,299 470,661 346,368 473,162 897,848 897,848

(Psuedo) R2 0.600 0.670 0.577 0.582 0.576 0.616 0.575 0.519 0.624

Exporter-year, importer-year and industry

The role of foreign banks in trade: event study

Event study

Using cross-sector variation in external financing helps to identify channel, plus all the robustness, but residual concerns on omitted variables may remain

Conduct event study (Trefler, 2004; Manova, 2008) Event: First time a bank from importing country j entered exporting

country i (i.e., establishment of a new bilateral link) Compare bilateral, sectoral exports before and after the event 187 bank entries from 65 importing countries in 76 exporting countries

(between 1995 and 2004)

Identification: impact of entry should again be strongest for sectors more dependent on external finance

Dependent variable & controls

Dependent variable: Growth average exports from country i to country j in sector s between

(t-1, t-3) and (t+1, t+3), where t is year of event

Controls: First-differencing effectively removes all sector-country pair fixed

effects, i.e., already controls for variations in initial conditions at the sector-country pair level at the time of entry

In addition, control for event-year fixed effects

OLS, standard errors double clustered by exporter and importer

∆𝐸 𝑖𝑗𝑠=𝛽1𝑒𝑥𝑡𝑓𝑖𝑛𝑠+𝜖𝑡+𝜂 𝑖𝑗𝑠 ,

Empirical model

Results Event Study

  BaseControlling for pre-

entry trend Extensive margin

  [1] [2] [3]

Extfin 0.346*** 0.194** 0.126**

(0.070) (0.077) (0.053)

Constant 0.271 0.111 0.358**

(0.170) (0.164) (0.147)

Fixed effects event-year fixed effects

Obs 3,806 3,217 968

(Pseudo-)R2 0.033 0.026 -

Results Event Study

  BaseControlling for pre-

entry trend Extensive margin

  [1] [2] [3]

Extfin 0.346*** 0.194** 0.126**

(0.070) (0.077) (0.053)

Constant 0.271 0.111 0.358**

(0.170) (0.164) (0.147)

Fixed effects event-year fixed effects

Obs 3,806 3,217 968

(Pseudo-)R2 0.033 0.026 -

Bilateral exports in sectors more dependent on external finance grow faster in three years after entry of bank from importing country

Economic significance: exports in sectors in 75th percentile of distribution grow 11.7 pp faster compared to sectors in 25th percentile

Results Event Study

  BaseControlling for pre-

entry trend Extensive margin

  [1] [2] [3]

Extfin 0.346*** 0.194** 0.126**

(0.070) (0.077) (0.053)

Constant 0.271 0.111 0.358**

(0.170) (0.164) (0.147)

Fixed effects event-year fixed effects

Obs 3,806 3,217 968

(Pseudo-)R2 0.033 0.026 -

Effect is maintained when controlling for pre-entry trend

Results Event Study

  BaseControlling for pre-

entry trend Extensive margin

  [1] [2] [3]

Extfin 0.346*** 0.194** 0.126**

(0.070) (0.077) (0.053)

Constant 0.271 0.111 0.358**

(0.170) (0.164) (0.147)

Fixed effects event-year fixed effects

Obs 3,806 3,217 968

(Pseudo-)R2 0.033 0.026 -

Entry also increases the likelihood that exports start taking place more in external finance dependent sectors

Robustness

Excluding exporting countries that experienced a banking crisis within 3 years before entry

Excluding exporting countries that liberalized equity markets around the year of entry

Measuring growth between year before and 4 years after entry

Indirect event study

Still possible lingering concerns, including about reverse causality, endogeneity

Assess impact of entry on exports by countries indirectly linked. Example:

US bank enters Brazil for first time US bank already present in Canada but no Canadian banks in Brazil Entry creates an indirect link between Brazil and Canada

Exporters in Brazil benefit from US presence in Brazil and in Canada

Nearly pure exogenous

Dependent variable: Growth average exports from country i to country m (m≠j) in sector s

between (t-1, t-3) and (t+1, t+3), where t is year bank from country j invests in country i and m is other country where banks from country j are already present at time t

  BaseControlling for pre-

entry trend Extensive margin

  [1] [2] [3]

Extfin 0.222*** 0.152*** 0.068***

(0.047) (0.054) (0.012)

Constant 0.374*** -0.350* -1.081***

(0.097) (0.186) (0.155)

Fixed effects event-year fixed effects

Obs 15,009 12,666 14,279

(Pseudo-)R2 0.027 0.025 -

Results indirect event study

  BaseControlling for pre-

entry trend Extensive margin

  [1] [2] [3]

Extfin 0.222*** 0.152*** 0.068***

(0.047) (0.054) (0.012)

Constant 0.374*** -0.350* -1.081***

(0.097) (0.186) (0.155)

Fixed effects event-year fixed effects

Obs 15,009 12,666 14,279

(Pseudo-)R2 0.027 0.025 -

Results indirect event study

Sectors more dependent on external finance experience higher export growth (also when controlling for pre-entry trend)

And increased likelihood of exporting in sectors more dependent on external finance

The role of foreign banks in trade: where and how?

Where and how do foreign banks affect trade?

Exploit that exporting countries and banks differ substantially Countries: several dimensions

Financial development; importance foreign banks; institutional environment; distance

Split countries in three groups using 33th and 66th percentile

Banks: globally active in trade finance; and not active Trade finance banks more likely have relevant specialized skills Parent bank in top 30 based on total syndicated lending for trade finance

purposes over period 1996-2004 (Dealogic) 23 parent banks, responsible for 30 percent of events

  All entries

  [1] [2] [3] [4] [5] [6]

Extfin 0.347*** 0.142 0.696*** 0.398*** 0.195* 1.067**

(0.070) (0.095) (0.154) (0.097) (0.110) (0.437)

Extfin * FD low 0.464

(0.308)

Extfin * FD int 0.342

(0.218)

Extfin * FB low -0.474**

(0.211)

Extfin * FB int -0.540**

(0.236)

Extfin * Enf bad -0.352

(0.246)

Extfin * Enf weak 0.090

(0.176)

Extfin * Info bad 0.267

(0.226)

Extfin * Info weak 0.217

(0.223)

Extfin * Distance -0.096*

(0.057)

Fixed effects event-year fixed effects

Obs 3,805 3,805 3,805 3,805 3,805 3,805

R2 0.033 0.038 0.039 0.037 0.035 0.035

Where? Country characteristics

  All entries

  [1] [2] [3] [4] [5] [6]

Extfin 0.347*** 0.142 0.696*** 0.398*** 0.195* 1.067**

(0.070) (0.095) (0.154) (0.097) (0.110) (0.437)

Extfin * FD low 0.464

(0.308)

Extfin * FD int 0.342

(0.218)

Extfin * FB low -0.474**

(0.211)

Extfin * FB int -0.540**

(0.236)

Extfin * Enf bad -0.352

(0.246)

Extfin * Enf weak 0.090

(0.176)

Extfin * Info bad 0.267

(0.226)

Extfin * Info weak 0.217

(0.223)

Extfin * Distance -0.096*

(0.057)

Fixed effects event-year fixed effects

Obs 3,805 3,805 3,805 3,805 3,805 3,805

R2 0.033 0.038 0.039 0.037 0.035 0.035

Where? Country characteristics

Foreign banks boost exports more when important in financial intermediation and when investing in countries close by

  Entries by important trade financers

  [7] [8] [9] [10] [11] [12]

Extfin 0.215** -0.005 0.459*** 0.209* -0.027 0.026

(0.087) (0.089) (0.157) (0.122) (0.074) (0.399)

Extfin * FD low 0.916***

(0.207)

Extfin * FD int 0.235***

(0.030)

Extfin * FB low -0.374**

(0.185)

Extfin * FB int -0.243

(0.158)

Extfin * Enf bad -0.195

(0.194)

Extfin * Enf weak 0.162

(0.164)

Extfin * Info bad 0.473**

(0.203)

Extfin * Info weak 0.385***

(0.140)

Extfin * Distance 0.024

(0.050)

event-year fixed effects

Obs 1,194 1,194 1,194 1,194 1,194 1,194

R2 0.052 0.069 0.056 0.054 0.059 0.052

How? Trade finance banks

  Entries by important trade financers

  [7] [8] [9] [10] [11] [12]

Extfin 0.215** -0.005 0.459*** 0.209* -0.027 0.026

(0.087) (0.089) (0.157) (0.122) (0.074) (0.399)

Extfin * FD low 0.916***

(0.207)

Extfin * FD int 0.235***

(0.030)

Extfin * FB low -0.374**

(0.185)

Extfin * FB int -0.243

(0.158)

Extfin * Enf bad -0.195

(0.194)

Extfin * Enf weak 0.162

(0.164)

Extfin * Info bad 0.473**

(0.203)

Extfin * Info weak 0.385***

(0.140)

Extfin * Distance 0.024

(0.050)

event-year fixed effects

Obs 1,194 1,194 1,194 1,194 1,194 1,194

R2 0.052 0.069 0.056 0.054 0.059 0.052

Where and How? Trade finance banks

Trade finance banks especially beneficial in countries with low financial development and weak creditor information

Suggests (transfer of) specialized technology and know-how is important reason why foreign banks facilitate trade

Where and How? Trade Banks

Globally active foreign banks Tend to be especially beneficial in exporting countries with low

level of financial development• Suggests that (transfer of) specialized knowledge and technology for

trade financing is important

Impact especially strong in exporting countries that lack creditor information• Suggests these banks can help overcome information problems

Impact not affected by strength of contracting environment and distance between exporting and importing country

  Entries by non-trade financers

  [13] [14] [15] [16] [17] [18]

Extfin 0.401*** 0.235* 0.792*** 0.478*** 0.343** 1.440**

(0.086) (0.139) (0.175) (0.118) (0.148) (0.574)

Extfin * FD low 0.252

(0.423)

Extfin * FD int 0.294

(0.285)

Extfin * FB low -0.503*

(0.262)

Extfin * FB int -0.701**

(0.298)

Extfin * Enf bad -0.419

(0.295)

Extfin * Enf weak 0.078

(0.205)

Extfin * Info bad 0.114

(0.284)

Extfin * Info weak 0.068

(0.309)

Extfin * Distance -0.141*

(0.079)

event-year fixed effects

Obs 2,611 2,611 2,611 2,611 2,611 2,611

R2 0.035 0.037 0.043 0.039 0.035 0.037

How? Non-trade finance banks

  Entries by non-trade financers

  [13] [14] [15] [16] [17] [18]

Extfin 0.401*** 0.235* 0.792*** 0.478*** 0.343** 1.440**

(0.086) (0.139) (0.175) (0.118) (0.148) (0.574)

Extfin * FD low 0.252

(0.423)

Extfin * FD int 0.294

(0.285)

Extfin * FB low -0.503*

(0.262)

Extfin * FB int -0.701**

(0.298)

Extfin * Enf bad -0.419

(0.295)

Extfin * Enf weak 0.078

(0.205)

Extfin * Info bad 0.114

(0.284)

Extfin * Info weak 0.068

(0.309)

Extfin * Distance -0.141*

(0.079)

event-year fixed effects

Obs 2,611 2,611 2,611 2,611 2,611 2,611

R2 0.035 0.037 0.043 0.039 0.035 0.037

Where and How? Non-trade finance banks

Non-trade finance banks can have positive impact, but only when foreign banks sufficiently important and investing in countries close by

Suggests such banks need an environment conducive to foreign banks and be closer by to overcome information and contracting problems, and thereby boost exports

Where and How? Non-Trade Banks

Non-globally active foreign banks Only positive impact if foreign banks sufficiently important in

financial intermediation in exporting country• Suggests that institutions have to be conducive to foreign banks for

these banks to be able to have impact

Level of financial development or creditor information irrelevant, but (very) weak contract enforcement reduces beneficial impact

Beneficial impact diminishes with distance• Foreign banks easier operate in countries that are closer (Mian, 2006)

Conclusions

Use unique dataset of bilateral foreign bank presence combined with data on bilateral sector exports for 95 exporting countries and 122 importing countries

Foreign banks do facilitate trade Especially when from importing country Especially when banks active in trade finance invest in (financially)

less developed countries

Suggests foreign banks have important benefits for the real economy

But need to take host country and foreign bank characteristics into account