HEC Research Papers Series,
HEC Paris

Abstract: The authors provide the first evidence that changes in risk-based capital requirements for banks affect the real economy through international trade. Using a natural experiment – mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012 – they investigate the impact of new risk-weights applied to commercial letters of credit (CLC) on that country’s exports to 174 countries. The authors estimate the resulting payment-term-cost elasticity of CLC-financed trade to be between -0.5 and -1 while the overall trade elasticity to be between -0.032 and -0.179. Calculations suggest that both CLC-related bank pricing and rationing channels are involved.

Keywords: commercial letters of credit; international trade finance; exports; risk-weights; Basel II

JEL-codes: F14; G21; G28

61 pages, October 28, 2014

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