Facts about Trade Finance

Here are some new facts and figures on trade finance from my paper International Trade, Risk and the Role of Banks (joint with Friederike Niepmann). See also, the VoxEU column Trade Finance Around the World.

First, how a letter of credit works:

Source: Niepmann and Schmidt-Eisenlohr (2014).

How important are letters of credit overall? SWIFT data that capture most letter of credit bank-to-bank flows in the world show:

LC flows of $2.3 trillion in 2011, corresponding to 13 percent of world trade.

How important are letters of credit for the World's top 10 importers and exporters (as a share of their imports and exports, respectively)?

As we show, there is a large heterogeneity in use of letters of credit and documentary collections across countries.

Source: Niepmann and Schmidt-Eisenlohr (2014), data from Swift Institute.

Conditional on trading positive amounts, how many country pairs have positive letter of credit flows?

The answer: surprisingly few. In particular, Sub-Saharan Africa (SSA) and Latin America and Caribbean (LAC) have limited access to this instrument.

Source: Niepmann and Schmidt-Eisenlohr (2014), data from Swift Institute.

What happened to trade finance during the Great Trade Collapse?

Our data indicate that in the riskier environment following the Lehman collapse in 2008 Q3, letters of credit use relative to exports experienced a strong increase (despite likely negative supply effects).

The figure shows the ratio of total SWIFT messages sent over exports:

Source: Niepmann and Schmidt-Eisenlohr (2014), data from Swift Institute.