Risk contagion among banks: evidence from Chinese data

ABSTRACT

This study investigates risk contagion in the financial system using a sample of 140 Chinese banks. We create the risk contagion index, with and without bank WMPs (Wealth Management Products), and bank’s lending matrix. Based on the index, we find Industrial and Commercial Bank of China (ICBC), Industrial Bank, and Bank of Shanghai to have the highest contagion risk among, respectively, state-owned, joint-stock and city commercial banks. We simulate risk contagion with these three banks as the initial bankrupt banks and at a wide range of default loss rates. We find that their hypothetic bankruptcies do not cause other banks to follow suit, but smaller banks are more subject to the contagion effect of systemic risk. Further results show that banks with WMPs cause greater risk contagion than those without.

KEYWORDS:

• Risk contagion index
• lending matrix
• simulation
• bank WMPs

JEL CLASSIFICATION:

• D85
• G21

Acknowledgments

We are grateful for the suggestions from Professor Hasan Iftekhar, Rose C. Liao, Haizhi Wang, as well as the comments from the seminar participants at Xi’an Jiaotong University. We also thank Muxin Liu from Xi’an Jiaotong University for the data collection. We gratefully acknowledge financial support from the Chinese Ministry of Education Humanities and Social Sciences Planning Fund (18YJA790112). All errors are our own.

Author contributions

Hong Zhao: Methodology, Project administration, Funding acquisition

Yiqing Lei: Methodology

Ying Zhang: Writing-Original Draft

Lingxiang Li: Review & Editing

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the the Chinese Ministry of Education Humanities and Social Sciences Planning Fund [18YJA790112].