Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees
Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees
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Volume/Issue:
Volume 2023
Issue 038
Publication date: February 2023
ISBN: 9798400234415
$20.00
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Topics covered in this book
This title contains information about the following subjects.
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Banks and Banking , Exports and Imports , Economics- Macroeconomics , Money and Monetary Policy , Economics / General , Bank guarantee , letters of credit , imports , exports , capital control , trade guarantor , cash-poor firm , outflow control , log letters of credit , bank intermediation channel , Capital controls , Credit , Commercial banks , Capital outflows , Asia and Pacific
Summary
Banks guarantee international trade through letters of credit. This paper analyzes what happens to trade when the critical role of banks as trade guarantors is compromised. Using the case of the Greek capital controls in 2015, the events around which led to a massive loss of confidence in the domestic banking system, we show that firms whose operations were more dependent on domestic banks suffered a steep decline in imports and, subsequently, exports. This operated through letters of credit, which during the capital controls period had to be backed by firms’ own cash collateral rather than the bank guarantee. As a result, cash-poor firms imported relatively less. Public intervention to guarantee transactions is shown to help mitigate some of the decline in imports.
