A New Measurement of Systemic Risk in China's Banking System

Abstract

At present, the measurement of systemic risk is still a worldwide challenge. The complex network theory provides a new perspective for the study of this problem. Based on the correlation coefficient between the banks calculated using their default probabilities, this paper builds China's banking networks for the periods of 2008-2019, and analyzes systematically the topological structure of the networks, and determine the size of the systemic risk from the perspective of network topology by using the corresponding characteristics of complex network with the feature of systemic financial risk. It is found that the systemic risk of China's banking industry has a declined tendency before 2018, and the main cause is due to the eigenvector centrality and clustering coefficient declined rapidly. However, after 2018, systemic risk showed a litter upward trend, and the increase of clustering coefficient and eigenvector centrality was the main reason for that upward trend. Before 2018, risk transmission was mainly taken place from local banks and joint-equity commercial banks to state-owned banks, which were the main risk bearers. After 2018, risk contagion mainly occurred among local banks, and some local banks role as systemically important ones. Therefore, dissolving the systemic financial risk in China should strengthen the regulation of local banks. In particular, the high-risk leverage operations and excessively innovative business should be strictly supervised so as to prevent the expansion and spread of the negative effects stemmed from maturity mismatch, maturity transformation and credit transformation.