Abstract
Frequent financial crises and economic globalization have made systemic risk a growing Research Topic. This paper constructs a dynamic banking system model based on the bank-asset bilateral network. By collecting the balance sheet and portfolio data of 47 Chinese listed banks in 2018, the paper firstly empirically analyses the impact of external shocks, the price-cutting effect, and the proportion of various assets held by banks to their total assets on the systemic risk of the banking system. The risk preference coefficient and systemic shock are then introduced to construct the banks' quantitative portfolio strategy model to study its optimal investment. It has been found that the greater the external shock and the stronger the price-cutting effect, the higher the systemic risk. Moreover, the external shock and price-cutting effect will have a superimposed effect within a specific range, and systemic risk will increase significantly. The asset classes of the Chinese banking system have a different sensitivity to external shocks, among which loan assets are the most sensitive. Further studies reveal an inflection point of risk preference, resulting in banks' expected return “increasing first and then decreasing.” The higher the debt-asset ratio and the stronger the banks' risk tolerance, the more aggressive investment strategies banks can choose to achieve high returns. This paper provides a reference for the banking industry to react to shocks and analyze systemic risk.
Highlights
Affected by global financial crisis, economic globalization, and the rapid development of Internet finance, the current financial environment is increasingly complex
The current research on the systemic risk of the banking system mainly focuses on two channels, the direct contagion channel based on the interbank lending market and the indirect contagion channel based on the portfolios of banks
The quantitative investment strategy model presented in this paper has introduced the banks’ risk preference and is based on the bilateral network, which is different from previous works [42,43,44]
Summary
Affected by global financial crisis, economic globalization, and the rapid development of Internet finance, the current financial environment is increasingly complex. Based on the above analysis, this paper builds a banking network system under the bank-asset bilateral network, collects Chinese banks’ actual portfolio data, and empirically studies the impact of external shocks, endogenous asset devaluations, and the proportion of various asset classes in the total bank assets on the systemic risk of the Chinese banking system. Huang et al [32], Chen et al [33], Caccioli et al [34], and Levy-Carciente et al [35] all developed bank (financial institution)-asset bilateral network models by the interconnection between two different types of nodes.
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