Assessing interconnectedness and systemic importance of Chinese financial institutions

Abstract

This study proposes a directed acyclic graph (DAG)-based framework for generalized variance decomposition for investigating the heterogeneous return spillovers in financial system and measuring the systemic importance of financial institutions among 34 listed Chinese financial institutions from 2011 to 2023. Findings indicate pronounced information spillovers among institutions within the same sector due to contemporaneous causal relationships. Both static and dynamic financial network analyses highlight the significance of the securities sector. Dynamic structural characteristics align with macroeconomic development and are sensitive to internal and external shocks. Systemic importance assessment reveals that market size alone doesn't determine importance, with notable disparities between banking and non-banking sectors. State-owned and joint-stock commercial banks play a vital role in banking, while local government and private capital-controlled institutions are crucial in the securities sector. This research aids regulatory efforts in maintaining a balanced regulatory environment, ensuring market efficiency, and reducing operational costs.