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The Network Gravity of Global Banking

Author

Listed:
  • Minetti, Raoul

    (Michigan State University, Department of Economics)

  • Romanini, Giacomo

    (Bank of Italy)

  • Ziv, Oren

    (Michigan State University, Department of Economics)

Abstract

A substantial fraction of international banking is intermediated through banking hubs and complex multi-national routing. These flows are ignored or unaccounted for, both theoretically and empirically. We develop an N-country DSGE model of lending where banks choose the path of lending through a network of partner institutions in multiple countries. Banking hub countries arise endogenously as central nodes in the intermediation network. The model provides a framework to rationalize observable international statistics with theoretical models of banking gravity. It generates a set of bilateral locational flow of funds that conceptually matches aggregate (BIS LBS) statistics, as distinct from the ultimate demand and supply of lending. Using a series of calibrations for both node and edge shocks, we show that accounting for the network is crucial for understanding the propagation of shocks and the impact of banking consolidation on aggregate fluctuations. The analysis reveals that neglecting the multinational banking network can lead to biased conclusions about the aggregate effects of banking unions.

Suggested Citation

  • Minetti, Raoul & Romanini, Giacomo & Ziv, Oren, 2023. "The Network Gravity of Global Banking," Working Papers 2023-4, Michigan State University, Department of Economics.
    • Handle: RePEc:ris:msuecw:2023_004
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous Banks; Gravity; Intermediation Network; Contagion;
    All these keywords.

    JEL classification:

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

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