Foreign banks and trade

Abstract

Exploiting unique, time-varying, bilateral data on bank ownership for many countries, we show that exports tend to be larger when a foreign bank from the importing country is present. Entry of a foreign bank also boosts export growth to the home country of the foreign bank relative to other countries, especially when foreign bank presence in the country is large and bilateral cross-border lending low. We find supportive evidence that foreign banks facilitate trade by reducing financial frictions for firms. Entry spurs exports to the foreign bank's home country especially in sectors more dependent on external finance, and particularly so in countries less economically and financially developed and with a higher share of foreign banks. Imports of external finance dependent sectors also grow more after entry, but less so than exports do. Exit of a foreign bank does not fully eliminate the beneficial effects of prior foreign bank presence on exports.