Do Community Banks Contribute to International Trade? Evidence from U.S. Small Business Banking

Abstract

We investigate if international trade financing credits provided by local community banks in a given state to small-and medium-size enterprises (SMEs) contribute to the state-level volume of international trade. The results show that aggregate commercial letters of credit (CLCs) issued by U.S. community banks have an economically and statistically significant explanatory power in describing local, state-level international trade. Community banks’ contribution to state-level international volume through trade credits to opaque SMEs manifests itself in manufacturing industry where bank dependency for SMEs is most pronounced. While we are mainly interested in the total volume of international trade (exports plus imports), we find that our results are predominantly driven by imports. Finally, the findings show that the positive association of CLCs issued by community banks with state-level international trade significantly attenuated during the financial crisis. Overall, we conclude that albeit constituting only 10% to 15% of all CLCs in the U.S. banking industry, CLCs issued by community banks play a nontrivial role for SMEs’ access to international markets, thereby positively affecting state-level international trade volume.