Macroprudential regulation for a dynamic Chinese banking system with a scale-free network

Abstract

The frequent global financial crises in recent years show that it is necessary to implement macroprudential regulation for the banking system. At present, quantitative research on the macroprudential regulation for the dynamic Chinese banking network system is lacking, while the related studies in other countries have not considered the interbank network structure. Therefore, in the present paper, we construct a dynamic banking network model with a scale-free network and a dynamic macroprudential regulation model under four risk allocation mechanisms (CVaR, Incremental VaR, Shapley value EL, and ΔCoVaR) for the dynamic Chinese banking network system. Then, we conduct empirical research to study the effect of the macroprudential regulation model on the Chinese banking network system. Our results show that the Chinese banking network system was the most unstable in 2010 and that the average default probability decreased every year after the macroprudential regulation, indicating the effectiveness of the macroprudential regulation model. From the perspective of the scale-free network structure, we find that the intrinsic mechanism of macroprudential regulation is to rewire the interbank linkages from small banks to large banks with more interbank lending to prevent contagious risk, thereby improving the stability of the entire banking system. Moreover, the regulation effects of ΔCoVaR and CVaR mechanisms are found to be better than those of the other mechanisms. The regulation effect of ΔCoVaR is the most significant.