The Role of Banks in the International Trade in the USA - Assignment Example

The Role of Banks in the International Trade in the USA Abstract Banks have been known to play a major role within the international trade through guaranteeing the international payments that contribute to a reduction of risks within the trade transactions. The current paper will review banks within the international trade finance, and United States will be used as a case study. The researcher will review banking data from United States to help in documenting new empirical parts on use of letters of credit as well as similar bank guarantees, both in United States and globally. Keywords: Multinational Banks, Exports, Imports and Trade Finance Banks in International Trade Finance: Evidence in US 1.0. Research Background Since the time in memorial, banks play a major role in the international trade. Despite them providing pre-import and pre-export loans, Banks act as financial intermediaries where they facilitate settlement of the international payments. The volume of the bank trade finance has been shown to vary substantially across various countries. The control for exports is normally hump-shaped within the country credit risk and increase with time required to import from destination market. Such responses are not uniform, and the trade finance adjusts the least in countries with an intermediate risk levels. This creates the need to study the implications of Schmidt-Eisenlohr payment contract choice model to explain observed a response of the bank trade finance to the global macroeconomic factors (Asmundson 2011, p. 13). 1.1. Problem Statement Letters of credit have been used consistently reduce the default risk by exporters and importers regarding their obligation in making any delivery or payment. Though such letters are relevant, their use is limited. Also, there has been minimal research on variance of demand of letters of credit with time. Therefore, this paper will investigate on the use of letters of credit within the international trade as well as establish the new empirical patterns. This will be the first work to investigate trade finance in United States and use data that changes based on time and destination country (Beck 2010, p. 107). 1.2. Research Objectives To investigate the link between trade and finance To find out how contract choice helps in predicting use of letters of credit in international trade To assess the extent of implementation of finance programs and letters of credit in developing countries 1.3. Research Questions i. What is the link between trade and finance? ii. How does the payment contract choice help in predicting use of letters of credit in international trade? iii. How are developing countries implementing the finance programs and confirming letters of credit? 1.4. Rationale for the Research The current research will provide key statistics regarding trade and finance which is critical in documenting various relationships. Some of the relationships include the changes in bank trade finance volume with increased global risks (Ahn 2011, p. 78). This will involve the use of a volatility index in measuring the expected volatility of the stock market in United States as well as reflect the risk attitudes both among the investors in United States and on a global scale. Also, the research will provide the trends of the variation in bank trade finance with global interest rates. It is said that increased number of exports and trade time is proportional to the number of service banks. Therefore, from the research, it will be possible to relate the importance of fixed costs for banks in guarantees in supply of trade. Such information on import-export is also critical reduction of risks in case their breach of obligation as it will be possible, from research, to tell the conditions through which a letter of credit can be obtained and the corresponding payments to be made. 1.5. Research Methodology The current research will review data from various sources to help in documenting patterns that represent high robust data features. 1.5.1. Data Collection The current research will use the secondary data collection methods. The trade fiancé data will be a review from Country Exposure Reports. The dataset will be in such a way that it captures substantial amount of the trade finance within the United States from 1997 to 2013. The activities within the trade finance sector in US vary across countries in terms of absolute values and trade finance intensities. 1.5.2. Data Analysis and Presentation The effects of global risk changes on the bank trade finance will be analysed using volatility index (VIX) measures within a period of 30 days. The response of the bank trade finance to aggregate funding conditions will be analysed using the 3-Month LIBOR rates. The Economic Intelligence Units (EIU) from various countries will be used to proxy the destination country risk. Data will be presented in tables and graphically using the Ms Excel application. 1.5.3. Problems in Implementing the Research Some of the problems likely to be experienced in implementing the research include the staffing issues such as absenteeism and unstable schedules and mistrust of the conducted research by the banks. The researcher can also experience difficulties in collecting data. The reports can be extensive making it hard to analyze the data. 1.5.4. Contribution to the Published Literature The current research will enhance understanding of the concepts internationalization process of banks and the processes involved. This will also contribute to development and testing of new hypotheses. Similarly, the current research has the potential of proposing and testing a new solution. This can also be extended to new territories such as a greater number of study sample in a totally new context can be used, and help in addressing methodological shortcomings of the previous studies adding credibility of the findings. 2.0. Literature Review Topic: How Firm Size and Firm Level Such As Enforcement, Sales and Capital, Skill Tensity Employment Influenced Payment Contracts Before and After Financial Crisis in 2008 2.1. Reasons for the Choice of the Review Materials The major source of data was secondary materials. The researcher first divided the topic into two sections. The first section evaluated the payment contracts before the financial crisis, while the second section reviewed the payments contracts after the financial crisis in 2008. This was in such a way to help get the perspective of the two periods them marry them to arrive at a conclusive research results. The firm size and firm level and their effects to the payment contracts have been investigated. Though there are quite a number of firm-level and firm size effects, the current research managed to get only some factors that can be considered as a representative of the rest. The literature reviewed relate heavily to extensive empirical literature work on bank-lending channel. The topic relates to various strands of the theoretical literature. Firstly, a large number of papers are available that contain information on trade credit between various firms. Secondly, several theoretical papers considered relationship between international trade and market conditions. Various policy papers have reviewed the trade finance. Schimidt-Eisenlohr develops the first model of payment contract choice within the international trade. The study by Ahn (2010) has managed to describe the reaction of financial crisis and trade finance. This has used data to test the predictions by the destination countries and the dynamics of the trade finance. Finally, Engenmann et al. and Eck et al have analyzed the process through which the international trade credit addresses problems of the asymmetric information among the sales people. A large empirical literature provides evidence on relationship between financial development and sectoral concentration of the sales. While the theory by Schmidt-Eisenlohr 2009 describes the main contributions of the work in presenting the firm level evidence for the developing countries regarding the choice of payment mode. 2.2. Results The rationales determining the choice of payment contract include financing of the costs where the firms facing low borrowing rates pre-finance the transactions. Also, imperfect contracts enforcement increase opportunistic behaviour since the firms doing the pre-finance uses the incentive of defaulting the contract. Any firm with weak contract enforcement must do the pre-financing in order to minimize the moral hazards. As the financial and legal development levels increase in general positivity, the above rationales can be in conflict while the payment contract choice remains non-trivial (Campello & John 2010, p. 470). The payment contracts can be used by firms as a means of overcoming the institutional impediments to trade. The trade credit literature illustrates several reasons for the use of supplier credit (Fazzari 2008, p. 141). Some authors argue that trade credit is a form of financing while other believe that some firms may exercise market power in order to get favourable contracts. Finally, literature argue that trade credits offered by firms signifies the quality of the product (Brissimis et al. 2012, p. 91). To shed more light of the study topic, most data is used from the enterprise surveys from developing economies in order to test the firm level predictions of the model. Identification of the firm level effects involves variation of choice in payment contract as well as differentiating the complex and non-complex industries within the model (Duchin & Berk 2010, p. 418) The payment contract choices within the international trade are under the effects of characteristics at the country level than the choice level within the domestic trade. Firms possessing a huge share of total sales react more to the variations in the country level, especially in financing costs and enforcement of contracts. 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Oil Price Shocks and Stock Market Volatility: Evidence from European Data. London, Routledge. Duchin, R., & Berk, A. (2010). Costly External Finance: using Firm-Level Data to Identify Transmission Channels. Journal of Financial Economics 97, pp. 418-435. Fazzari, S. (2008). Financing Constraints and Corporate Investment. Brooking Papers Review, pp. 141-195. Read More