Abstract
Correlation networks and risk spillovers within financial institutions contribute to the generation and dissemination of systemic risk. In this paper, a risk correlation network is constructed among Chinese banks employing the maximum entropy method, which simulates the individual risks of banks in the presence of exogenous shocks, the contagious risks, and total systemic risk through the effect of network spillovers, and analyzes its influencing factors. The results show that there is an increasingly rising trend in the overall systemic risk of China’s banking industry, and that the value of systemic risk is relatively large. From the perspective of the composition of banking systemic risk, individual risk accounts for a large proportion, about 70%, which is the main source of banking systemic risk, among which China’s state-owned commercial banks are the largest source. The contagious risk of banks accounts for about 30%. Furthermore, the contagious risk contribution of various banks is basically negatively correlated with their scale. The smallest urban commercial bank in the banking industry contributes at least 50% of the contagion risk, while the state-owned commercial bank, which accounts for about 40% of the total assets of the banking industry, only contributes less than 30% of the contagion risk.
Highlights
In the financial system, a variety of financial institutions are related to each other through direct channels or indirect channels
This paper built a bank systemic risk model to simulate and analyze the expected losses of 158 Chinese banks when exposed to exogenous shocks, and obtained the systemic risk of Chinese banks from 2013 to 2018
(2) Banking systemic risk is based on individual risk
Summary
A variety of financial institutions are related to each other through direct channels (business linkage) or indirect channels (the same asset holdings). Earlier ones, such as Frankel and Rose [21], were modeled with unit probabilities and maximum likelihood estimates; an analysis of 22 years of economic data from 105 developing countries yielded the relationship between currency devaluation and the currency crisis Recent ones, such as Corsi et al [22], used the Granger causal test to identify the risk contagion network between 33 global systemically important banks and 36 sovereign debts and analyzed the risk contagion during the European sovereign debt crisis. This research enriches the existing systemic risk measurement method literature, provides more empirical evidence to better identify the risk infection effect of different types of financial institutions in systemic financial risk, helps to further build and improve the risk prevention mechanisms of different types of banks, and provides a reference for maintaining the stability and security of the financial market
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