Concentrated Commonalities and Systemic Risk in China’s Banking System: A Contagion Network Approach

Abstract

Chinese banking system has seen increasing convergence in exposures to different asset types. This concentrated commonalities have far reaching implications on systemic financial risk. By subdividing banks' assets on their balance sheets into 20 types, we construct a bipartite financial network using China's data in 2019 and 2020. A linear model is proposed to measure each bank's systemic importance (SI) and indirect vulnerability (IV), and the contagion strength between pair-wise banks (C), with respect to exogenous shocks originated from different sectors of the real economy. Results show that (1) concentrated common exposure to mortgage is demonstrated to be the most significant source of systemic vulnerability; (2) the derived contagion network shows the property of ``small world, which plays an important role in generating systemic risk, amplified non-linearly by multi-rounds of contagion; (3) Agricultural Bank of China along with seven other banks are identified as systemic important, Guangdong Development Bank as well as five other regional banks are suggested to be vulnerable, and Postal Savings Bank of China and China Construction Bank are critical nodes in transmitting risks. These findings contribute to more efficient and preciser macro prudential regulations.