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Common Banking across Heterogenous Regions

Author

Listed:
  • Enzo Dia
  • Lunan Jiang
  • Lorenzo Menna
  • Lin Zhang

Abstract

We describe the existence of a substantial dispersion of interest margins charged by commercial banks among Chinese provinces and find empirically that the main drivers of interest margins are resource costs. We build a parsimonious dynamic stochastic general equilibrium model featuring both banking and production sectors that we calibrate at both the national and provincial levels. Our model can explain a considerable share of the interest margin charged at the provinicial level, and we find evidence that when Chinese banks adopt a technology imposing the same capital share across provinces, their productivity becomes substantially lower. Since the differences in wages in Chinese provinces are substantial, the adoption of a common technology implies an inefficient industrial structure for the banking industry and a substantial cost for the economy. The adoption of a standardized technology also generates a stronger response of the loan rate to productivity shocks, and thus the capability of banks to smooth regional idiosyncratic productivity shocks hitting firms declines substantially.

Suggested Citation

  • Enzo Dia & Lunan Jiang & Lorenzo Menna & Lin Zhang, 2018. "Common Banking across Heterogenous Regions," CFDS Discussion Paper Series 2018/2, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
  • Handle: RePEc:fds:dpaper:201802
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Interest margins; resource costs; Chinese economy;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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