Reshaping Global Trade: The Immediate and Long-Run 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 exports financing abroad. Countries exposed to bank failures in London immediately exported significantly less and did not recover to pre-crisis trend levels. Their market shares within each destination were significantly lower for four decades. Decomposing the persistent losses shows that they primarily stem from lack of extensive margin growth relative to unexposed countries, as importers sourced more from new and unexposed trade partners. 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.