Academic journal article Journal of International Business Research

International Trade Financing: The U.S. versus the World

Academic journal article Journal of International Business Research

International Trade Financing: The U.S. versus the World

Article excerpt

INTRODUCTION

Much of the long history of banking can be traced to banks providing international trade financing (see, i.e., Green, 1989). And in today's global economy, a nation's economic strength is closely tied to its ability to compete in the global marketplace. As much of modern commerce relies on the efficient functioning of financial markets, the role of banks providing the financial services necessary for businesses to conduct international business activities can not be overstated.

More specifically, banks play a very important role in facilitating international trade. Banks not only provide letters of credit (L/Cs), a significant component of the financing that is often necessary in many international trade transactions, but they also act as the primary conduit through which the payments for such transactions flow. Whether providing L/Cs, confirming (guaranteeing) another institution's L/C on behalf of a customer, or simply handling the flow of documents associated with international trade transactions, banks have always been at the focal point of international trade and commerce.

The role of banks is likely critical to the success of smaller companies engaged in international business, the companies that make up the bulk of trade-oriented companies in the U.S. For example, the Department of Commerce reports that large exporting companies (those employing 500 or more workers) are responsible for seventy-one percent of the value of U.S. exports but only represent three percent of the number of exporters (U.S. Department of Commerce, 2007). This means that the vast majority of exporters, and by association importers as well, are small- and medium-sized companies.

It is probably safe to assume that many smaller companies engaged in international trade rely heavily on their banks for assistance. Furthermore, because of their small size, many of them likely rely on smaller banking enterprises, often referred to as community banks. In fact, due to the strong relationships and personalized services provided by community banks, they remain critical to the success of smaller companies with nearly forty percent of smaller companies using community banks, rather than their much larger money center brethren in New York and elsewhere, for the majority of their financing needs (Bernanke, 2006).

However, in examining U.S. banking statistics, one finds some disturbing trends of apparent disinterest in providing trade financing services on the part of those very same community banks. For example, in 1984 nearly thirty percent of the 7,200 large community banks in the U.S. (i.e., those assumed to have the size and clientele necessary to have international services requested of them) provided letter of credit financing, while by the end of 2006 that figure had fallen to less than seventeen percent of the 4,000 large community banks remaining after two decades of consolidation within the banking industry. In fact, much of the slack in providing trade credit appears to be being taken up by foreign banks eager to develop and expand their markets in the U.S. (Ramchander, Reichert & Jayanti, 1999). These foreign banks have been vocal in demonstrating their importance to the economic well-being on the U.S. (Institute of International Bankers, 1997). Even former Federal Reserve Board Chairman Alan Greenspan noted how foreign banks have become important providers of liquidity and depth to the U.S. banking system and how they have become significant sources of credit for all types of businesses throughout the country (Greenspan, 1991)

This paper examines various trends in trade financing activities within the U.S. banking sector, particularly the apparent abandonment of the international banking sector by U.S. banks, or at least the middle-tier thereof. It also looks at the move by foreign financial institutions to fill the gap that this phenomenon has created. …

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