Impacts of the COVID-19 Pandemic on Chinese Banking System: Measuring Volatility Connectedness

Abstract

In this paper, we study the impacts of the COVID-19 pandemic on the connectedness of the Chinese banking system, and explore the heterogeneity effect of this pandemic. We construct static and dynamic analysis on 14 Chinese banks by building the volatility spillover network proposed by Diebold and Yilmaz to assess the volatility spillover effects caused by COVID-19, and compare it with the previous financial crises in the past 12 years. The empirical findings show that the COVID-19 did impact the connectedness of Chinese banking system and its structure within the system, with the 14 Chinese banks highly interconnected especially during COVID-19 era. In addition, the highly connected and contagious status of Chinese banking system didn't stay long during COVID-19 era compared with previous crises. Moreover, we find a shock-passing path during the COVID-19 era: big banks deliver more shocks to the middle banks, and the middle banks send more shocks to small banks. At the same time, our work presents that state-owned banks, during COVID-19 era, were more contagious and the local banks were more vulnerable compared with their historical performance.