Forthcoming, Review of Financial Studies
When local banks lose access to correspondent banking services, their corporate clients' exports decline. Firms only partially substitute lost exports with domestic sales, resulting in lower total revenues, lower employment, and market exit.
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Abstract
We study how terminated correspondent banking relationships affect international trade. Drawing on firm-level export data from emerging Europe, we show that when local banks lose access to correspondent services, their corporate clients (especially small- and medium-sized enterprises) experience significant export declines. Firms only partially offset lost exports with higher domestic sales, resulting in lower total revenues and employment. Other firms cease operations entirely. These firm-level impacts aggregate to lower product-level exports from countries more exposed to correspondent bank retrenchment.