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Research on Contagion Effect of China’s Commercial Banking Risk

Author: ZhaoYanJie
Tutor: HuangRuiFen
School: Ocean University of China
Course: Financial
Keywords: commercial bank risk contagion contagion effect VAR model
CLC: F832.33
Type: Master's thesis
Year: 2013
Downloads: 8
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Commercial banks act as an important intermediary role in risk contagion during financial crisis in history. The subprime crisis gave the very best illustration of how commercial banks transmitted risk to the whole economy. Ever since the crisis, more researches have been done on the study of contagion effect of commercial banking system. China’s banking system has never been through any catastrophic risk events due to the implementation of strict business separation and extreme protection from the government. Apart from that, a lower degree of openness to the international financial markets and the control on interest rates has made China relatively independent from changes in the global economy. What kind of risk status is China’s commercial banking system facing up to? How do risk in the banking system transmit? This dissertation will give a thorough explanation on the contagion effect of China’s commercial banking system.In doing the empirical research, China’s commercial banks are classified in accordance as the state-owned commercial banks, joint-stock commercial banks and city commercial banks. A series of economic variable indicators’daily yield and listed commercial banks’stock price daily yield are used as the object of the research. The empirical research is using Granger causality test, value-at-risk regression and variance decomposition technique to measure the contagion effect of economic variables acting on China’s commercial banking system and contagion effect of the banking system itself. Thus the dissertation analyzes the possible exogenous and endogenous factors affecting China’s bank system.The qualitative analysis concludes that the soft budget constraint mechanism is the basic cause of China’s systemic bank risk. Under this mechanism, China’s commercial banks are very dependent on government credit and subsidies. The commercial bank system will never face bankruptcy unless the government was plunged into the plight of liquidity. China’s commercial bank risk is ultimately resolved by the government’s capital injection and the support of government reputation. That is how the banking system keeps running smoothly in China. However this risk resolving mechanism will undoubtedly exacerbate moral hazard in the banking system and lead to the inefficiency and fragility of the bank system. In addition, the homogeneity in competition, unreasonable market structure, highly centralized lending operations, as well as mixed operation trend is the reason why risk contagion is happening in China’s banking industry.The empirical research shows that small banks are more sensitive to the fluctuation of the Shanghai Composite Index which means the fluctuation of the capital market has a stronger effect on small banks’risk contagion than on larger banks. Domestic interbank market rate fluctuation has no risk spillover effect on the most banks except for the ICBC. Quite the contrary, international interbank market rate fluctuation shows a certain level of spillover effect on small and medium-sized banks instead of large banks. Therefore, there might be potential risk of liquidity shortage among China’s banking system. All banks in the research are significantly affected by the fluctuation of corporate bonds interest spreads, and shows negative spillover effect, which means the enterprise channel is one of the main channel to transmit risk to the bank system. All the banks more or less affected by the change of the US economic cycle and domestic economic cycle.Compared to the state-owned banks and joint-stock banks, the city commercial banks are much more sensitive to the market factors, which mean the city commercial banks are easier to be affected by all kinds of risk and weaker to digest and resist risk. There is a significant contagion effect among State-owned banks, joint-stock banks and the city commercial banks, plus the contagion effect after the outbreak of the financial crisis shows a significant increase.

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