Estimating the direct impact of bank liquidity shocks on the real economy: Evidence from letter-of-credit import transactions in Colombia

This study identifies and provides an estimate of the impact of bank liquidity shocks on real economic activity by exploring letter-of-credit import transactions in Colombia during the 2008 to 2009 global financial crisis. The detailed dataset on letter-of-credit transactions allows for exploiting within-importer-exporter variation across issuing banks. The study finds substantial effects of bank liquidity shocks on letter-of-credit import transactions: banks that were more vulnerable to adverse liquidity shocks-proxied by the ex ante reliance on wholesale funding or borrowings from foreign banks-reduced letter-of-credit issuances more in both intensive and extensive margins. The study also confirms that it had real effects: importer-exporter pairs that relied more on letter-of-credit transactions experienced a greater reduction in their total imports in response to adverse bank liquidity shocks.