Bank lending and trade wars
Financial intermediaries play an important role in financing global transactions. In this paper, Core et al. examine how international trade uncertainty influences banks’ lending. The authors focus on the effects of trade uncertainty on U.S. banks’ credit supply by exploiting the spike in trade uncertainty that occurred during the 2018–2019 Trade War. They use data from quarterly bank-firm loan commitments of a minimum size of $1 million extended to domestic (public and private) firms by the U.S. banks that are subject to annual stress tests in a difference-in-differences estimation framework. Their findings include:
- An increase in trade uncertainty is associated with a larger credit contraction for more exposed banks vis-à-vis all borrowers, including those that are less exposed to an increase in trade uncertainty.
- More exposed banks reduce the maturity of loans and shift toward types of loans that can be called in early by banks, consistent with a wait-and-see attitude.
- More exposed firms are unable to substitute for reduced bank lending through alternative sources of finance and these firms exhibit lower total debt growth and investment rates.
Our results highlight an important banking channel for the transmission of uncertainty shocks to the real economy and caution against protectionist trade policies that are a major source of ongoing economic uncertainty. Our analysis also suggests that a full accounting of the macroeconomic effects of trade disputes and other globalizing events should take into account the endogenous contractionary responses of the financial sector.
Trade Uncertainty and U.S. Bank Lending
Authors: Ricardo Correa, Julian di Giovanni, Linda S. Goldberg, Camelia Minoiu
From: Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, Federal Reserve Bank of Atlanta
