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A Study of Inter-bank Risk Contagion

Author: LiZuo
Tutor: ShenPeiLong
School: Shanxi University of Finance
Course: Finance
Keywords: Inter-bank market Balance sheet Risk contagion
CLC: F832.3
Type: Master's thesis
Year: 2014
Downloads: 3
Quote: 0
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Abstract


Once the crisis broke out, due to the inter-bank market risk exposure exists, theimpact of individual bank failures has not limited itself, but through bank transactionswill be subject to the risk of the spread of infectious entire banking system, making theseemingly safe and sound banking system been a huge hit. In order to prevent the riskcontagion, the primary task is to prevent the impact of the financial crisis caused by thecredit chain dismantling the network on the basis of risk causes theory. Therefore, thecurrent study of the banking system contagion mechanism is particularly important forthe maintenance of security and stability of the domestic financial system.From a perspective of a bank’s balance sheet, this paper considers mutual businesscontacts between banks is a direct cause of the risk contagion, as demonstrated bychanges in the actual structure of the business and assets of a bank. This change will bereflected as the balance sheet contagion channel. This channel emphasizes linkagesbetween the various institutions within the system are contagion channels.Interconnections between banks on deposits, credit and payment system will inevitablylead to the collapse of a bank associated with bank-payment difficulties. If it notcompensate for the loss of its own capital, the bank is likely to collapse. So, deliverychain reaction can lead to a systemic banking crisis.Based on the above analysis, given the assumption distribution of banks’ creditlending, this paper selects the dismantling of16listed banks’ data at the end of the thirdquarter of2013, using Matlab software to calculate the inter-bank bilateral risk exposurematrix. Given the different LGDs, this paper makes the risk contagion simulationanalysis, respectively considering the sample data bank as the initial bankrupt bank. Theresults show that only when the LGD is100%, the Bank of China and Industrial andCommercial Bank will lead to the collapse of other banks, and the contagion effecttriggered by the collapse of Industrial and Commercial Bank of China is stronger thanthe Bank of China.The empirical results verify the inter-bank market risk channels and path ofinfection is present and can be learned. The results show that the failure of state-ownedbanks can easily lead to systemic risk in the banking system and makes the large-scalejoint-stock banks become the main members of contagion process. And it shows that therisk of Chinese banking systemic has significant positive correlation with the risk level of large state-owned commercial banks and national joint-stock commercial banks.

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