Concentrated commonalities and systemic risk in China's banking system: A contagion network approach

Qing Shi, Xiaoqi Sun and Yile Jiang

International Review of Financial Analysis, 2022, vol. 83, issue C

Abstract: China's banking system has seen increasing convergence in exposures to different asset types. These concentrated commonalities have far reaching implications on systemic financial risk. Based on the commonality structure of banks' balance sheets, we construct a bipartite financial network and design novel indicators to analyze the systemic risk of China's banking system and its relation to the real economy. Results show that (1) considering the interconnectivity, indirect loss arising from common exposure is much higher than direct loss; (2) concentrated common exposure to mortgage is demonstrated to be the most significant source of systemic vulnerability in China; (3) the derived contagion network shows the property of “small world”, which plays an important role in generating systemic risk, amplified non-linearly by multi-rounds of contagion; (4) a bank's systemic importance/vulnerability depends on complex interaction between asset volume, leverage rate, and its commonality of asset composition to other banks. The model proposed in this study provides a new structural perspective to investigate the systemic risk, and a macroprudential instrument to complement existing stress testing that contributes to more efficient and precise regulations. Moreover, we contribute a ranking framework to assess each bank's systemic importance as well as vulnerability corresponding to specific real sectors.

Keywords: Systemic risk; Network; Balance sheets; Chinese banks (search for similar items in EconPapers)
JEL-codes: C65 G01 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:83:y:2022:i:c:s1057521922002113

DOI: 10.1016/j.irfa.2022.102253

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