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Banking complexity in the global economy

Author

Listed:
  • Raoul Minetti

    (Michigan State University)

  • Giacomo Romanini

    (Bank of Italy)

  • Oren Ziv

    (Michigan State University)

Abstract

International lending flows are often intermediated through banking hubs and complex multi-national routing. We develop a dynamic stochastic general equilibrium model where global banks choose the path of direct or indirect lending through partner institutions in multiple countries. We show how conflating locational loan flows with ultimate lending causes bias in the results both by attributing ultimate lending to banking hubs, and by missing ultimate lending that occurs indirectly via third countries. We then study the effects of global banking complexity, the aggregate degree of indirect credit allocation, e.g. via affiliates, subsidiaries or complex financial arrangements. Indirect lending allows countries to bypass shocked lending routes via alternative countries; however, it dilutes their ability to diversify sources of funds following shocks. The quantitative analysis reveals that banking complexity can exacerbate credit instability when countries feature heterogeneous banking relative efficiency.

Suggested Citation

  • Raoul Minetti & Giacomo Romanini & Oren Ziv, 2025. "Banking complexity in the global economy," Temi di discussione (Economic working papers) 1485, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1485_25
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    More about this item

    Keywords

    indirect lending; banks; locational loan flows; financial integration;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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