Non-Traditional Systemic Risk Contagion within the Chinese Banking Industry

Tonmoy Choudhury,Jaime Yong,Simone Scagnelli,Zhaoyong Zhang

doi:10.3390/su13147954

Tonmoy Choudhury, Jaime Yong + Show 2 more

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https://doi.org/10.3390/su13147954

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Journal: Sustainability	Publication Date: Jul 16, 2021
Citations: 6	License type: CC BY 4.0

Affiliation: Edith Cowan University

Abstract

Systemic risk contagion is a key issue in the banking sector in maintaining financial system stability. This study is among the first few to use three different distance-to-risk measures to empirically assess the domestic interbank linkages and systemic contagion risk of the Chinese banking industry, by using bivariate dynamic conditional correlation GARCH model on data collected from eight prominent Chinese banks for the period 2006–2018. The results show a relatively high correlation among almost all the banks, suggesting an interconnectedness among the banks. We found evidence that the banking system is exposed to significant domestic contagion risks arising from systemic defaults. Given that Chinese markets deliver weak signals of forthcoming stress in banking sectors, new policy intervention is crucial to resolve the hidden stress in the system. The results have important policy implications and will provide scholars and policymakers further insight into the risk contagion originating from interbank networks.

Highlights

Chinese Banking Industry.Since its path-breaking initiatives of reforms launched over four decades ago, China’s economic development has been miraculous
We find evidence that the internal banking system is exposed to extreme contagion risks from the domestic interbank defaults
This paper presents a comprehensive analysis of the systemic risk contagion of Chinese banks

Summary

Introduction

Since its path-breaking initiatives of reforms launched over four decades ago, China’s economic development has been miraculous. According to the World Bank, China’s GDP grew from USD 149.5 billion in 1978 to USD 14.3 trillion by 2019, with real GDP growth averaging nearly 10% a year despite the recent slowdown. The GDP value of China accounts for 11.8% of the world economy. Since 2010, China has surpassed Japan to become the world’s second-largest economy by nominal GDP, and overtaken the United States as the world’s largest economy in terms of purchasing power parity (PPP) since 2014. Remarkable has been the incredible expansion of China’s banking system, accounting for

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