The Fight Against Financial Crime: How Global Banks’ De-Risking Affects Trade and the Local Economy

Authors: Karolin Kirschenmann (ZEW) and Lea Steinrücke (ZEW, University of Mannheim and Frankfurt School of Finance & Management)

Title: The Fight Against Financial Crime: How Global Banks’ De-Risking Affects Trade and the Local Economy

Abstract: This paper investigates the importance of correspondent banking for trade and firm performance in emerging Europe. We exploit the unexpected "structural break" in the U.S. regulator’s enforcement of financial crime offences as a supply shock to correspondent banking limiting the availability of payment transaction possibilities and trade finance products for local firms. Using industry-level bilateral trade data, we show that the withdrawal of correspondent banks has substantial negative effects on trade in emerging Europe. The effect is stronger for trading partners with a large geographical distance, for countries with high foreign bank presence and for industries with high trade finance dependence. Industries with a high proportion of small, local firms are more affected by the withdrawal than those with large, multinational firms. The results are corroborated by firm-level evidence.