Systemic Risk in the Chinese Financial System: Measuring and Ranking

Abstract

In this article, we try to analyze the systemic risk of the Chinese financial institutions following the subprime crisis of 2007. We use a sample of seventy Chinese financial institutions during the period from January 2, 2008 to June 30, 2015. We employ the SRISK as a measure of systemic risk. This measure is used to determine financial institutions activity default and its potential to become systemic in whole financial system. The SRISK measure indicates not only individual financial institutions vulnerability but also the default dependency structure between financial institutions and the Chinese financial market returns. Also, these measures can be moderately useful for identifying systematically important financial institutions. Besides, the empirical findings indicate that the systemic risk of the Chinese financial institutions is very important. The contribution of each financial institution to the risk of the whole financial system in China is very significant. We show that the dynamic conditional correlation between financial institutions and market return is the main factor of the systemic risk in China. The results of systemic risk decomposition show that the institution which has the higher level of debt contributes positively and extremely to systemic risk.