Measuring Bank Systemic Risk in China: A Network Model Analysis

Abstract

Correlation networks and risk spillovers within financial institutions contribute to the generation and dissemination of systemic risk. In this paper, a risk correlation network is constructed among Chinese banks employing the maximum entropy method, which simulates the individual risks of banks in the presence of exogenous shocks, the contagious risks, and total systemic risk through the effect of network spillovers, and analyzes its influencing factors. The results show that there is an increasingly rising trend in the overall systemic risk of China’s banking industry, and that the value of systemic risk is relatively large. From the perspective of the composition of banking systemic risk, individual risk accounts for a large proportion, about 70%, which is the main source of banking systemic risk, among which China’s state-owned commercial banks are the largest source. The contagious risk of banks accounts for about 30%. Furthermore, the contagious risk contribution of various banks is basically negatively correlated with their scale. The smallest urban commercial bank in the banking industry contributes at least 50% of the contagion risk, while the state-owned commercial bank, which accounts for about 40% of the total assets of the banking industry, only contributes less than 30% of the contagion risk.