How Does Exogenous Shock Change the Structure of Interbank Network?: Evidence from China under COVID-19

Abstract

This paper utilizes China’s interbank deposit system under COVID-19 to examine how interbank network changes with considerable uncertainty surrounding exogenous shock. We investigate the interbank network in China by specifying the core-periphery pattern to disentangle the network development and the pandemic onset. In order to model the interbank deposit system, maximum entropy and partition-based approach are employed to estimate the bilateral exposures for banks and identify the network structure, respectively. We find that the four largest global systemically important banks (G-SIBs) in the world play a critical role in bearing interbank burden under this crucial period by increasing interbank assets and decreasing interbank liability. By comparing the situations before and after the outbreak of the pandemic in stress-testing, the empirical evidence shows that the number of core banks and capital of banks is declined in 2020Q2; however, the topological structure of the network is increasingly similar to a typical core-periphery pattern, and the changed interbank network can better absorb the loss and interrupt the contagion of systemic risk.