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Common Banking across Heterogenous Regions

Enzo Dia (), Lunan Jiang, Lorenzo Menna () and Lin Zhang

No 2018/2, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

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.

Keywords: Interest margins; resource costs; Chinese economy (search for similar items in EconPapers)
JEL-codes: E1 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-tra
Date: 2018-08
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Persistent link: https://EconPapers.repec.org/RePEc:fds:dpaper:201802

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