DP11565 Risk-Based Capital Requirements for Banks and International Trade

Author(s): Banu Demir, Tomasz Michalski, Evren Örs
Publication Date: October 2016
Keyword(s): Basel II, international trade finance, letters of credit
JEL(s): F14, G21, G28
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11565

We find that changes in banks' risk-based capital requirements can affect firm-level exports. We exploit the mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012. This change affects risk-weights for letters of credit and generates two identification schemes with opposite predicted signs. Using data that cover 16,662 exporters shipping 2,888 different products to 158 countries, we find that the share of letter of credit-based exports decreases (increases) at the firm- country-product level when the associated counterparty risk-weights increase (decrease) after Basel II adoption. However, growth of firm-product-country level exports remains unaffected.