DP19373 Broken Relationships: De-Risking by Correspondent Banks and International Trade
We exploit unique information on terminated correspondent bank relationships to investigate the impact of payment disruptions on international trade. Drawing on firm-level export data from emerging Europe, we show that when local respondent banks lose access to correspondent services, their corporate clients experience a significant decline in exports. This trade contraction occurs on both the extensive margin, with fewer firms exporting, and the intensive margin, with existing exporters shipping lower values. Affected firms only partially offset lost exports with higher domestic sales, resulting in lower total revenues and employment. Other firms cease operations entirely. These firm-level impacts aggregate to lower industry-level exports in countries more exposed to correspondent bank retrenchment. Our findings highlight the vital role of correspondent banks in facilitating cross-border payments essential for international trade.
