Analysis of China Commercial Banks’ Systemic Risk Sustainability through the Leave-One-Out Approach

Xiaoming Zhang,Stefano Zedda,Chunyan Wei

doi:10.3390/su12010203

Xiaoming Zhang, Stefano Zedda + Show 1 more

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https://doi.org/10.3390/su12010203

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Abstract

One of the main issues in the recent Chinese financial reform is aimed at effectively measuring systemic risk and taking appropriate measures to ensure its sustainability and prevent new crises. In this paper, we firstly introduced the present macro-prudential policies implied in China and pointed out the existing problems. Secondly, we analyzed the banks’ assets riskiness and the banks’ probability to default, then, by means of a leave-one-out model, we measured each commercial bank systemic risk contribution. Thirdly, based on comprehensive empirical results and theoretical analysis, we provided some references for macro-prudential regulation and supervision. Results show that systemic risk is increasing in 2013–2017, in particular with reference to contagion risk, with a specific concentration within joint-stock commercial banks, suggesting a specific attention of regulators and supervisors for this category.

Highlights

As the 2008 financial crisis demonstrated, a single financial institution failure can have devastating consequences for the entire financial system and for the real economy, as the banking industry is closely connected to a country’s economic development.As reported, among others, by Silva [1], there is a negative feedback mechanism between the financial sector and the real sector, so, banks’ systemic crises lead to a vicious cycle of fire sales and illiquidity diffusion, worsening the macro economy framework and banks’ asset quality, this inducing higher shares of non-performing loans, and the risk of more bank defaults.After the global financial crisis, how to prevent systemic crisis has become one of the main issues under the attention of regulators
The analysis is developed on a sample of 25 Chinese listed banks, classified as large state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks, data coming from Orbis Bank Focus database, for 2013–2017
From 2013 to 2017, the total assets value (TA) increased by 51.67%, denoting an important expansion, higher than the GDP growth, (which scored a +30.7% in the same time span, data coming from Workdbank accompanied by the synchronous increase of risk-weighted assets (RWA), of capitalization (TC) and of interbank liabilities (IB-), while interbank credits (IB+) show in the same time span a progressive reduction from 10.39% of 2013 to 5.64% of 2017

Summary

Introduction

As the 2008 financial crisis demonstrated, a single financial institution failure can have devastating consequences for the entire financial system and for the real economy, as the banking industry is closely connected to a country’s economic development.As reported, among others, by Silva [1], there is a negative feedback mechanism between the financial sector and the real sector, so, banks’ systemic crises lead to a vicious cycle of fire sales and illiquidity diffusion, worsening the macro economy framework and banks’ asset quality, this inducing higher shares of non-performing loans, and the risk of more bank defaults.After the global financial crisis, how to prevent systemic crisis has become one of the main issues under the attention of regulators. As the 2008 financial crisis demonstrated, a single financial institution failure can have devastating consequences for the entire financial system and for the real economy, as the banking industry is closely connected to a country’s economic development. While Basel I and II were aimed at improving the safety and soundness of individual financial institutions from a micro perspective, the Basel III framework takes full account of the risk exposure of individual banks and their interbank linkages from a systemic perspective, in order to prevent the occurrence of a systemic financial crisis. Global systemically important financial institutions (G-SIFIs) have been identified to address issues that are ‘too big to fail’. The Basel Committee on Banking Supervision (BCBS) identified systemically important financial institutions from five indicators: size, interconnectedness, market importance, fungibility, and global activity [3]. The minimum capitalization level must be attentively evaluated, for correctly balancing the costs and benefits, as to say, of safety and efficiency of the banking system

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