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.
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).