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Research on the Bilateral Contagion Risk Effect and Risk Prevention of China’s Interbank Market

Author: WangLiLi
Tutor: QianShuiTu
School: Zhejiang Technology and Business University
Course: Finance
Keywords: Export Shock Risk Contagion Systemic Risk Prevention of Risk
CLC: F832.3
Type: Master's thesis
Year: 2013
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Abstract


In recent years, with the increasing concern of the importance of preventing financial systematic risk, people from various circles came to realize and began to study and explore how to prevent and reduce systematic risks, which now become the focus study of risk management. The biggest features of a systematic crisis are risk spillover and contagion effects. There are a lot of common risk exposures in bank industry; therefore an accident within the system is likely to result in losses for all the banks, which may even lead to the bankruptcy of some banks. The complex inter-bank credit relationships make banks easily infected and stimulate the outburst of systematic risk.Therefore, this paper employs export trade volume as common external shock to identify possible risk factors. Then the interbank market is examined and the annual data of20banks from2008to2012are used so as to estimate the bilateral interbank market risk contagion effect for balance-sheet related banks at different loss rates. It is suggested that raising bank capital and changing system network structure can effectively prevent interbank contagion, which is confirmed by empirical works and also the main innovation of this paper.The main conclusions are as follows. First, under external export shock, the less solvent a bank is, the greater it is affected; and smaller banks are more vulnerable to external shocks. Though they are not systematically important banks in the network, but its bankruptcy at a certain loss rate is contagious. Second, according to an analysis of the data from2008to2012, the anti-risk capacity of China’s commercial banks has been increasing since2010, suggested by the decline in bankruptcy loss rate. Third, the bilateral risk contagion effect of inter-bank is closely connected with network, when the induction factors are more closely related to other bank relation measures, the bankruptcy threshold is lower and the system is less stable. Fourth, in our country, increasing capital and optimizing network inter-bank can effectively reduce bankruptcy loss rate and prevent risk, but the former is better. In the prevention of contagious risk, bank regulatory authorities should not only pay attention to interbank trading markets, but also consider more about the resistance capacity of closely related institutions under an external shock.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks
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