Broken Relationships: Derisking by Correspondent Banks and International Trade

Abstract

We study how terminated correspondent banking relationships affect international trade. Drawing on firm-level export data from emerging Europe, we show that when local banks lose access to correspondent services, their corporate clients, especially small- and medium-sized enterprises, experience significant export declines. 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 product-level exports from countries more exposed to correspondent bank retrenchment. (JELF14, F15, F36, G21, G28, L14)