Does Trust among Banks Matter for Bilateral Trade? Evidence from Shocks in the Interbank Market

Abstract

Do financial crises have an impact on trade flows via a shock to corporate risk or to bank risk? Focusing on Italy’s exports during a period characterized by both the global financial crisis and by the sovereign debt crisis, we exploit the prediction of standard trade models according to which financial shocks should be magnified by the time needed to ship a good to the importer’s country and by sector-level financial vulnerability. We also use bank-pair data on Italian banks’ assets and liabilities vis-à-vis their foreign bank counterparts in a specific country to construct proxies for the availability of trade finance in a given market. We find evidence of a negative impact of financial shocks on exports, especially to more distant countries and in more financially vulnerable sectors. The main channels seem to be mainly related to an increase in corporate risk (reflecting shocks to bank finance and to buyer-supplier trade credit), while the ‘contagion effect’ of shocks stemming from bank risk seems to be much less significant.

Keywords: bilateral trade, interbank markets, counterparty risk

JEL Classification: G21, F14, F30, G30, L20