In the first chapter, we present a model that can capture the effects of banking networks and the potential for spillovers from the concentration of claims at financial hubs. In particular, we gauge the implications from indirect international flows and the role of financial hubs with respect to intermediation costs. Using the variation from direct and indirect banking flows provided by the Consolidated and Locational banking statistics from the Bank for International Settlements, we use the model to recover the bilateral and expected edge-specific costs through minimal distance estimation, thus providing a theoretical estimation of the unobserved cost usually proxied by a combination of observable distance measures. A network model defines the extensive margin. Then, we embed the Allen and Arkolakis (2019) transportation model in a Eaton and Kortum (2002)setting to allow for endogenous financial hub formation and incorporate the choice of path. The intensive margin of lending flows arises from banks choosing the path within a network through which they allocate their corporate lending, while decentralized bilateral shocks determine the interbank network equilibrium. In the second chapter, we investigate the role of intermediation networks in propagating shocks. We study a dynamic multicountry gravity model where banks can send loans to firms either directly or indirectly, through network paths across countries. To the best of our knowledge, it is the first DSGE that allows for endogenous network paths. We show how our model can be used in several settings. First, the model can show how shocks to a node (country) transmit international through a network. Second, we present the first attempt to include edge shocks in a DSGE model. Following an increase in the intermediation shock between two counties, the presence of a country with network centrality implies negative network effects on all bilateral flows, and positive effect on domestic loan issued in non-central countries. Third, we explore changes in node centrality following a shock to multiple edges in the network, as in Brexit. Finally, we show how networks and indirect flows amplify the role of agglomeration forces, where financial hubs emerge by exploiting information-based scale economies. How does the expansion of multinational banks influence the business cycle of host countries? In the third chapter, we study an economy where multinational banks can transfer liquidity across borders through internal capital markets but are hindered in their allocation of liquidity by limited knowledge of local firms' assets. We find that, following domestic banking shocks, multinational banks moderate the depth of the contraction but slow down the recovery. A calibration to Polish data suggests that multinational banks reduce the average depth of recessions by about 5% but increase their duration by 10%. The predictions are broadly consistent with evidence from a large panel of countries.
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