The Shocks in the Interbank Market: An Analysis of China and the US

Abstract

We compare the contagion risk in the interbank market between China and the United States during the period from 2011 to 2013. Applying simulation method, we find that the contagion risk of an individual bank shock in the US interbank market is relatively lower than that in China during the period. For a group bank shock, we find that the group with the lowest capital adequacy ratio in China induces a serious contagion, while the group with the highest concentration degree in the US induces a mild contagion. One potential reason is that the additional capital of most commercial banks in China is relatively lower than that of the US and most banks in China highly depend on the interbank market for acquiring liquidity or income.