A stable systemic risk ranking in China’s banking sector: Based on principal component analysis

Libing Fang, Binqing Xiao, Honghai Yu and Qixing You

Physica A: Statistical Mechanics and its Applications, 2018, vol. 492, issue C, 1997-2009

Abstract: In this paper, we compare five popular systemic risk rankings, and apply principal component analysis (PCA) model to provide a stable systemic risk ranking for the Chinese banking sector. Our empirical results indicate that five methods suggest vastly different systemic risk rankings for the same bank, while the combined systemic risk measure based on PCA provides a reliable ranking. Furthermore, according to factor loadings of the first component, PCA combined ranking is mainly based on fundamentals instead of market price data. We clearly find that price-based rankings are not as practical a method as fundamentals-based ones. This PCA combined ranking directly shows systemic risk contributions of each bank for banking supervision purpose and reminds banks to prevent and cope with the financial crisis in advance.

Keywords: Systemic risk rankings; Principal component analysis; Fundamentals; Banking supervision (search for similar items in EconPapers)
JEL-codes: C13 C32 C53 E17 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:492:y:2018:i:c:p:1997-2009

DOI: 10.1016/j.physa.2017.11.115

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