Financial Interlinkages and Contagion Risk in the Interbank Market in China

Since the global financial crisis occurred in 2007,systemic risk study has raised interests from both regulatory institutions and academic field.Based on data collected from 61 banks,this paper estimates the danger of contagion in the interbank market in 2009 and calculates the contagion path and capital loss from credit default and liquidity risk aspects.We also analyze the effect of market structure on contagion risk.Furthermore,we conduct an empirical study on micro-characteristics of systematic banks and contagious banks,and provide some suggestions on government surveillance. Firstly,we assume a complete structure of interbank markets to calculate the minimum of contagion risk.We find that under different default loss rates the failure of all developing banks,joint-owned banks and city commercial banks does not have contagion effect.Only the Bank of China and the Industrial and Commercial Bank have the contagion effect and asset loss accounts for 1.2%.The state-owned banks and joint-owned banks are major players in the interbank market structure.We further assume that city banks lend and borrow money only from developing banks,state-owned banks and joint-owned banks.We find that under this relatively concentrated structure the number of bank failures and capital losses from contagion effect increase significantly.We also consider the combined shock of credit default and liquidity risk.Since banks cannot finance from the failed bank they need to sell parts of liquidity assets and use fire-sail in order to create a good balance sheet.We find that under the combined effect of default credit and liquidity risk,the number of failed banks and capital losses from contagion effect also increase significantly. Finally we conduct an empirical study on micro-characteristics and influencing factors,such as assets,risk exposures and non-performing loans of systematic banks and contagious banks.We find that bank types,assets and risk exposures are main factors to identify systemic banks.In addition,bank types,capital adequacy and exposures are main factors to identify banks that are easy to be affected in crisis.