Unraveling Double Shocks: An In-Depth Analysis of Risk Contagion in China’s Inter-Bank Market

Mengting Fan, Zan Mo, Qizhi Zhao, Yi Liang (18922486122@163.com), Shaoyang Guo and Yanjun Chen
Additional contact information
Mengting Fan: Guangdong University of Technology
Zan Mo: Guangdong University of Technology
Qizhi Zhao: Guangdong University of Technology
Yi Liang: Guangdong Shunde Rural Commercial Bank Co
Shaoyang Guo: Guangdong University of Technology
Yanjun Chen: Guangdong University of Technology

Journal of the Knowledge Economy, 2024, vol. 15, issue 4, No 174, 20298 pages

Abstract: Abstract In an era marked by intricate financial networks and evolving market dynamics, this research delves into the labyrinth of risk contagion in China’s inter-bank market to enhance financial stability. Focusing on the double shocks of counterparty breach and liquidity crisis, we scrutinize the systemic vulnerabilities and financial implications for both systemically and non-systemically important banks. Our study employs a comprehensive simulation approach, utilizing data from 157 banks in 2021, covering most Chinese provinces and representing approximately 80% of the nation’s banking assets. The analysis encompasses the construction of long- and short-term inter-bank market matrices, providing insights into network topology and the identification of systemically important institutions. We map risk contagion hotspots across China’s provinces by dividing the inter-bank market by province and visualizing transaction patterns. Our findings reveal that systemically important banks are more susceptible to financial stress and risk contagion under double shocks, resulting in heightened liquidity pressure, default risks, and capital losses. Moreover, our novel methodology of balance sheet re-scaling highlights the significance of regulatory metrics, emphasizing the importance of the loan-to-deposit ratio and leverage ratio in mitigating risk contagion effects. By striking a balance among key supervisory metrics, regulators and bank managers can bolster risk resilience and fortify the inter-bank market against the perils of double shocks. Our study serves as a reference point for regional risk management strategies and contributes to a deeper understanding of inter-bank risk contagion dynamics in the face of double shocks.

Keywords: Risk contagion; Inter-bank market; Double shocks; Financial system stability; Regulatory metrics; Chinese banking sector (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s13132-024-01882-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jknowl:v:15:y:2024:i:4:d:10.1007_s13132-024-01882-4

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/13132

DOI: 10.1007/s13132-024-01882-4

Access Statistics for this article

Journal of the Knowledge Economy is currently edited by Elias G. Carayannis

More articles in Journal of the Knowledge Economy from Springer, Portland International Center for Management of Engineering and Technology (PICMET)
Bibliographic data for series maintained by Sonal Shukla (sonal.shukla@springer.com) and Springer Nature Abstracting and Indexing (indexing@springernature.com).