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Macroprudential Regulation for the Chinese Banking Network System with Complete and Random Structures

Qianqian Gao (), Hong Fan () and Shanshan Jiang ()
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Qianqian Gao: Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China
Hong Fan: Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China
Shanshan Jiang: Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China

Sustainability, 2018, vol. 11, issue 1, 1-22

Abstract: There has been little quantitative research on macro-prudential regulation for the Chinese banking system while the existing relevant research in other countries has not considered the network structure. Therefore, the present paper constructs a dynamic Chinese banking network system with complete and random structures and a quantitative model of macro-prudential regulation using four risk allocation mechanisms (Component VaR, Incremental VaR, Shapley value EL, and ΔCoVaR). Then we analyze empirically the macro-prudential regulation effect on the dynamic Chinese banking network system. The results show that the macro-prudential regulation focus on capital requirements for the Chinese banking network system is very effective in that most banks’ default probabilities have been reduced. Moreover, the regulation effect of the ΔCoVaR mechanism is the most significant and it has strong applicability because it is not affected by the two network structures. The next effective methods are Component VaR and Shapley value EL mechanisms. The last is the Incremental VaR mechanism. The Chinese banking system with random network is more stable in most years than that of the complete network. Lastly, our analysis suggests that setting up capital requirements based on each bank’s systemic risk contribution is able to promote the stability of the Chinese banking system.

Keywords: risk allocation mechanism; macro-prudential regulation; complete network; random network (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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