Economics Seminar | Intermediation Costs and Banking Hubs in the Global Network, Dec. 4

Friday, December 4, 2020 3:00pm to 4:15pm

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The Economics Seminar Series presents Giacomo Romanini discussing "Intermediation Costs and Banking Hubs in the Global Network" on Friday, Dec. 4, from 3 to 4:15 p.m.

Romanini is a doctoral student in the Department of Economics at Michigan State University.

For more information about the Economics Seminars, contact Dr. Roberto Duncan.

Abstract: We study the effects of banking networks and the potential for spillovers from the concentration of claims at financial hubs. In particular, we gauge the implications from indirect international flows and the role of financial hubs with respect to information costs. Global banks choose the path within a network through which they allocate their lending, given the cost of the transaction. Hence, a change in the cost on one edge of the network, namely the route of a financial flow from country A to country C through country B, has an effect on the entire network. Moreover, the change will have general equilibrium effects on non-banking sectors of the economies of the countries, which will in turn feed back into the edges of the banking structure. We embed the Allen and Arkolakis (2019) transportation model in an Eaton and Kortum (2002) setting to allow for endogenous financial hub formation and incorporate the choice of path. We use the model to estimate the overall edge-specific costs. The model requires weak assumptions about the exact specification of any particular process that generates the banking flows, and it can account for origin-destination pair characteristics. Finally, we use the estimated costs in a general equilibrium model to evaluate how changes in the cost structure of the edges propagate, as well as to measure spillovers through financial hubs.

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