Non-Traditional Systemic Risk Contagion within the Chinese Banking Industry

Tonmoy Choudhury, Simone Scagnelli, Jaime Yong and Zhaoyong Zhang
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Tonmoy Choudhury: School of Business & Law, Edith Cowan University, Perth, WA 6000, Australia
Simone Scagnelli: School of Business & Law, Edith Cowan University, Perth, WA 6000, Australia
Jaime Yong: School of Business & Law, Edith Cowan University, Perth, WA 6000, Australia

Sustainability, 2021, vol. 13, issue 14, 1-16

Abstract: Systemic risk contagion is a key issue in the banking sector in maintaining financial system stability. This study is among the first few to use three different distance-to-risk measures to empirically assess the domestic interbank linkages and systemic contagion risk of the Chinese banking industry, by using bivariate dynamic conditional correlation GARCH model on data collected from eight prominent Chinese banks for the period 2006–2018. The results show a relatively high correlation among almost all the banks, suggesting an interconnectedness among the banks. We found evidence that the banking system is exposed to significant domestic contagion risks arising from systemic defaults. Given that Chinese markets deliver weak signals of forthcoming stress in banking sectors, new policy intervention is crucial to resolve the hidden stress in the system. The results have important policy implications and will provide scholars and policymakers further insight into the risk contagion originating from interbank networks.

Keywords: contagion; DCC-GARCH model; distance to capital; distance to default; distance to insolvency; Chinese banks (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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