Risk-Based Capital Requirements for Banks and International Trade

Banu Demir , Tomasz Kamil Michalski (1) , Evren Ors (1)

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

We provide the first evidence that changes in risk-based capital requirements for banks affect the real economy through international trade. Using a natural experiment – mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012 – we investigate the impact of new risk-weights applied to commercial letters of credit (CLC) on that country’s exports to 174 countries. We estimate the resulting payment-term-cost elasticity of CLC-financed trade to be between -0.5 and -1 while the overall trade elasticity to be between -0.032 and -0.179. Calculations suggest that both CLC-related bank pricing and rationing channels are involved.

Keywords: commercial letters of credit; international trade finance; exports; risk-weights; Basel II

Domains: Business administration

Banu Demir, Tomasz Kamil Michalski, Evren Ors. Risk-Based Capital Requirements for Banks and International Trade. 2014. ⟨hal-02018542⟩