Economics seminar: Trade in Banking Services

Event Date: 27 November 2013

Professor Ian Wooton, University of Strathclyde

Time: 16.15-17.30

Department of Economics

Rm 2.11 Architecture Bldg

Abstract:

We construct a 2-country, regional model of trade in financial services. Competitive firms in each country manufacture untraded consumer goods in an uncertain productive environment. These firms face financial constraints, with cash being required in advance of production in order to pay for factor inputs. These funds are obtained by borrowing from banks, where loans are repaid after the successful production and sale of goods. Banks can choose their levels of monitoring of firms in order to maximise the expected returns from lending. Each country is host to a single bank which can lend in both countries, where there is higher cost to international lending, compared to the provision of loans to domestic firms. Banks have two sources of funds: their (fixed) equity holdings of the bank; and monies raised from (insured) savings of depositors. The regulator in each country establishes a (binding) capital requirement, mandating the minimum share of equity in the lending portfolio of its bank. We determine the optimal levels of monitoring and the international allocation of lending in equilibrium. We then examine how the level of this capital constraint affects economic activity, offering some preliminary results.

Published: 23 January 2014