Interbank Business Transaction And Risk Contagion Based On The Perspective Of Financial Network

In recent years, with the rapid expansion of interbank business in China, maturity mismatch of interbank business has been the main operation model of the interbank capital. The development of interbank business not only raises the risk of single bank, but also forms the channel of risk contagion in the banking system. This is mainly manifested in two aspects; on the one hand, the interbank business transaction increases the association of the assets and liabilities between banks, which will form a complex transaction network of interbank business in the banking system. The complex transaction network of interbank business becomes the important channel of conducting risk among banks, in which each bank is the node and the transaction between banks is the directed edge. On the other hand, maturity mismatch of interbank business amplifies the liquidity shortage in the interbank market, and then single bank may have debt default due to the difficulty of fund turnover. In this situation, the risk caused by the debt default will spread along the transaction network of interbank business. "Monetary shortage" event that occurred in the banking system of China in June 2013 is the best example. Therefore, this paper discusses the interbank business transaction and risk contagion based on the perspective of financial network, which will have important practical significance.This paper firstly explains why maturity mismatch of interbank business easily causes the liquidity shortage in the interbank market, which involves the risk contagion problem. And then, on the base of network structure effect and the formation of network, which are two aspects of social network research, this paper analyzes the process of risk contagion from the network structure and transaction behavior of interbank business.The main work and conclusion of the core chapter are as follows.Firstly, chapter three briefly introduces the main characteristics of interbank business development of commercial banks in China and the potential danger of risk contagion. Maturity mismatch of interbank business is the main operation model of the interbank capital, which easily causes the liquidity shortage in interbank market and induces the risk contagion. The network associated by the interbank business transaction among banks is the significant medium of risk contagion. Meanwhile, the regression analysis based on the panel data of listed banks in China shows that the deepening of financial disintermediation, the increase of competition, the improvement of the financial creativity and the slowdown of macroeconomic growth are the main reasons of interbank business development of commercial banks in China. However, avoiding the regulation of loan to deposit ratio is not the main reason. This shows that the development of interbank business is the inevitable choice of the commercial banks in the situation of the special finance and economic in China. Thus, although there is potential danger of inducing risk contagion for interbank business, the risk regulation of interbank business should dredge rather than block. Therefore, it is meaningful to analyze how to reduce risk contagion by the adjustment of the structure of assets and liabilities associated network from the perspective of financial network.Subsequently, in chapter four, this paper constructs a theory model to illustrate how maturity mismatch of interbank business causes the liquidity shortage in interbank market. The research shows that when the rational commercial banks expects the funding liquidity risk will increase in future, they will increase the proportion of liquidity assets owning to the perceptional demand of liquidity and a highly leveraged bank will hold a higher proportion of liquidity assets. When lots of commercial banks increase proportion of liquidity assets, it can lead to the decrease of liquidity supply and exacerbate the liquidity shortage in the interbank market. This is the main reason of "monetary shortage" event in June,2013, in China. Besides, the analysis of the structure of credit relationship network shows that a bank with financing demand is easier to finance from the credit relationship network with a larger average degree.If interbank market liquidity was severe, part of banks would have debt default due to the difficulty of fund turnover and result in risk contagion in the banking system. Therefore, this article mainly discusses that problem in the fifth chapter and the sixth chapter, along the two respective aspects of social network research, the network structure and the transaction behavior.Subsequently, in chapter five, based on the data of total assets and total liabilities of interbank business in China, this paper constructs the transaction network to simulate the process of risk contagion. And then, this paper analyzes how to reduce the degree of risk contagion by changing the transaction network structure of interbank business. The research shows that both the scale of interbank business and the network structure can influence the risk contagion. Under the circumstance of maintaining the average network degree, the increasing network connections among banks with larger assets scale and decreasing network connections of banks with smaller assets scale can reduce risk contagion in the network effectively. Thus, although the expansion of the interbank business scale may increase the degree of risk contagion, it is conducive to banking system stability by encouraging larger banks to develop interbank business and restricting smaller banks to develop interbank business.Lastly, chapter six constructs an endogenous transaction network of interbank business to discuss how the different transaction behaviors of interbank business affect the risk contagion, with the consideration of transaction characteristics in the interbank business. The research shows that in the interbank business, if the main of interbank business transaction behavior among banks is that larger banks lending, the risk contagion is lighter in the interbank assets and liabilities associated network formed by that transaction behavior. This has also been proved in the chapter five. On the contrary, if the main of interbank business transaction behavior among banks is that smaller banks lending, the risk contagion is larger. Thus, the transaction behavior that smaller banks lend assets to larger banks will not necessarily reduce the risk of smaller banks. In the reality, larger banks are the main funds suppliers and smaller banks are the main funds demanders in the interbank lending market in China. However, the smaller banks are the main funding suppliers in interbank deposit and also buying financial assets and return sale business. Thus, in contrast, the structure of interbank lending network in China is not conducive to conduct the risk.Above all, maturity mismatch of interbank business easily causes the liquidity shortage in the interbank market and induces risk contagion. The network associated by the interbank business transaction among banks is the dominant channel of risk contagion. Therefore, with the rapid expansion of interbank business, the potential risk contagion of interbank business has seriously affected the stability of the banking system in China. However, regulatory authorities should not limit the expansion of the interbank business scale owning to the potential danger. It is suggested that regulatory authorities reduce the degree of risk contagion by changing the transaction network structure of interbank business. It is necessary for regulatory authorities to guide the interbank transaction behaviors of commercial banks in China.The feature and innovation of this paper are reflected in the following points. First, this paper focuses on the perspective of financial network. The modern banking system is a financial network formed by the transaction between banks. The perspective of financial network, which describes the financial system as a complex network, has the natural advantage of analyzing the risk contagion. The existing studies about the risk of interbank business in China, rarely involve the perspective of financial network. Meanwhile, the interbank business transaction affects the network structure. However, the existing studies about the relationship between network structure and risk contagion, rarely consider the specific development situation of interbank business of each country. The domestic literatures about risk of interbank business rarely involve this perspective. Second, this paper analyzes the risk contagion from the network structure and transaction behavior of interbank business. This paper fills the gap of the existing studies that ignore the behavior behind the change of network structure. Analysis about the change of the network structure focuses on the connection variation among part of nodes inside the network, which is different from the existing studies. Existing studies compare the difference of risk contagion between various network structures, such as, the comparison of small-world social network and random network. Third, this paper constructs a theoretical model to explain the reason that maturity mismatch of interbank business causes the liquidity shortage in the interbank market, which fills the gap of domestic studies that are based on the qualitative analysis and lack systematic theory. This paper also introduces the credit relationship network and how the structure of credit relationship network affects the lending behavior of banks based on the model of Acharya and Skeie (2011).