Discussion paper

DP17163 Reshaping global trade: the immediate and long-term effects of bank failures

I show that a disruption to the financial sector can reshape the patterns of global trade
for decades. I study the first modern global banking crisis originating in London in 1866
and collect archival loan records that link multinational banks headquartered there
to their lending abroad. Countries exposed to bank failures in London immediately
exported significantly less and did not recover their lost growth relative to unexposed
places. Their market shares within each destination also remained significantly lower for
four decades. Decomposing the persistent market-share losses shows that they primarily
stem from lack of extensive margin growth, as the financing shock caused importers to
source more from new trade partnerships. Exporters producing more substitutable
goods, those with little access to alternative forms of credit, and those trading with
more distant partners experienced more persistent losses, consistent with the existence
of sunk costs and the importance of finance for intermediating trade.

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Citation

Xu, C (2022), “DP17163 Reshaping global trade: the immediate and long-term effects of bank failures”, CEPR Press Discussion Paper No. 17163. https://new.cepr.org/publications/dp17163