March 30th, 2018
Discussion Paper 2018/2 is now available: Dia, E. / Jiang, L. / Menna, L. / Zhang L.: Common Banking across Heterogenous Regions
Abstract: We document the existence of a substantial dispersion of interest margins charged by commercial banks among Chinese provinces, and we build a parsimonious dynamic stochastic general equilibrium model featuring both banking and production sectors that we calibrate at both the national and provincial level. Our model can explain a considerable share of the interest margin charged in different provinces, and we find support for the hypothesis that Chinese banks adopt a similar technology across different provinces. Since in the case of Chinese provinces differences in wages are substantial, the adoption of a national technology implies an inefficient industrial structure for the banking industry. The adoption of a common nationwide technology generates also a stronger response of the rate on loans to productivity shocks than would be the case if banks adopted different technologies in different provinces, and the capability of banks to smooth regional idiosyncratic productivity shock hitting firms declines substantially.