Research On Determinants And Contagion Mechanisms Of Chinese Banking Systemic Risk

Marked with Lehman brothers filed for bankruptcy, this crisis has a history of nearly six years. However, its impact on the global financial markets, the regulatory framework and macroeconomic has more intensified. In order to prevent the financial crisis break out again, some professional institutions have constructed, such as the Financial Stability Oversight, the Council Office of Financial Research,and the European Systemic Risk Board,and so on. Chinese government also is accelerating to build macro-prudential management framework.However, when we review the current financial crisis reform policy and its effects for the past six years, we can find that its actual effect is not as expected. At present, there exit several inconceivable facts in the financial system: the large financial institutions have bigger scale; "too big to fail" problem has not been solved; the sizes of the shadow banking system expand further; the financial system dependent more on the central bank's decision,and so on.The eighteenth National People's Congress of the communist party of China has pointed out clearly that we should firmly hold the bottom line that prevent the systemic risk and regional financial risk, which highlights the serious situation of financial security and the urgency of accelerating build the macro-prudential management framework. Therefore,this paper carefully analyzes the definition of systemic financial risk,and the different property of risk buildup phase,shock materialization phase, amplification and propagation phase, and the key nature of research, risk types and research method of systemic risk. Then, based on the market data and financial data of Chinese listed commercial banks,this research combines contingent claim analysis (CCA) and various econometric methods(space panel econometric methods and common correlation effects (CCE) panel econometric methods) to unlock the mysteries of systemic risk and gradually open up the formidable "Pandora's Box".Different from the current domestic studies that merely construct the risk measures of systemic risk using the foreign methods directly, this study compares the advantages and disadvantages and flexibility of different four kinds of estimate methods of contingent claims analysis, then pick up volatility restrict estimate method to build risk measures include distance-to-default. And combining spatial panel and common correlated effects method, to explore the determinants and contagion mechanisms of systemic risk in detail,aimed to provide new theoretical basis and empirical support for constructing macro-prudential management framework. Specially, the main research content of this dissertation is as follows.Chapter 1 is the preface. The research background and significance of this paper are proposed, relevant definitions and method are explained, contents and innovations are also introduced.Chapter 2 reviews the domestic and foreign literature on systemic risk. This paper sums up six key problems of systemic risk. The first one is potentially excessive risk building up in financial institutions; second is the growth bubbles of asset prices; third is relationship between sovereign risk and systemic risk; fourth is amplification channels among domestic economic sectors; fifth is contagion channels through cross-border spillovers; sixth is the probability of a systemic crisis. We found that the foreign research mainly focus on measures of systemic risk, the transmission mechanism between countries and sectors, but the determinants and contagion mechanisms among financial institutions is relatively little, especially the risk spillover and contagion channels. And, some of foreign research method is only suitable for developed countries, may not be directly applied to China, But the domestic research mostly with foreign methods directly,such as forward-looking risk methods,cross-section methods,financial network approach, macroeconomic methods and stress testing.Chapter 3 exploits the systemic risk of Chinese banking system based on contingent claims analysis. Because the application of CCA method is very broad,we will analyzes the dynamic change properties of systemic risk of Chinese banking system with this method. Based on the 2008 to September 2013 equity data and financial data of 14 listed Chinese commercial banks, this study constructs a series of systemic risk measures, such as the volatility of bank implied asset, average distance-to-default (ADD), portfolio distance-to-default (PDD) and expected loss (EL). Then analyses the dynamic nature of systemic risk based on the ADD and PDD comovement. Particularly, we compare the different four kinds of estimate method to estimate the implied asset and its volatility,which are volatility restriction method, KMV method, MLE method, and market value proxy method. The systemic risk will arise when the difference between the ADD and PDD is going small, systemic risk will reduce when the difference is going big.Chapter 4 studies the determinants and the contagion mechanisms of systemic risk through combining the CCA method and spatial panel econometric method.Based on 2009 January to 2013 September market data and balance sheet data of 11 listed commercial banks and macro-financial data, this chapter quantifies the determinants and the contagion mechanism of systemic risk. Firstly, we build the monthly risk measure (DD) of banks using the volatility restriction method of CCA; then construct two kinds of spatial weight matrix using the financial ratio and stock return of banks; lastly, exploit the determinants and the contagion mechanism of systemic risk. From the empirical results,we have several findings.The risk spillover effect measured by the spatial parameter is very significant even after controlling the macro-financial variables and bank-specific variables. This implies that contagion mechanisms are important risk factors of systemic risk. And,from the average direct effects, average indirect effects and total effect parameters of macro-financial variables and bank-specific variables, we found that the strength of risk transmission is significant. So, the regulators should consider the risk spillover effects of banks when we construct the macro-prudential management framework.Chapter 5 analyzes the determinants and the contagion mechanisms of systemic risk through combining the CCA method and CCE method, especially study the spillover effects of "contiguity banks". CCE method can capture the cross-section dependence and risk contagion channels of bank risk, and the impacts of the unobserved variables, which is constructed by Pesaran (2006).Based on the empirical results, we have several important findings. The bank risks which are measured by DD have significant comovement and cross-section dependence. This finding suggests that there may exit many observed and unobserved factors can affect the risk of bank. The bank-specific factors have significant effects on the bank risk. There may have many kinds of contagion mechanism of systemic risk,such as the asset-liability among banks,similar earning models and "economic proximity". The most important empirical finding is the risk spillover effect measured by contiguity matrix is very significant after controlling many macro-financial variables and bank-specific variables. This also implies that the contagion mechanisms of bank risk are very important drivers of systemic risk.Chapter 6 is the summary of this study and macro-prudential policy. This chapter summarizes the macro-prudential history of Federal Reserve, which may be a good reference for China to construct the macro-prudential policy framework.Then, we provide some advices for the macro-prudential policy. We argue that the most important issue for financial regulars is measures and management of systemic risk.This paper makes some contributions to the literature. Firstly, we exploit the flexibility of CCA estimate method in Chinese banking system through compare different four kinds of estimate method, which are volatility restriction method,KMV method, MLE method and market value proxy method. And we analyze the dynamic natures of Chinese banking systemic risk base on the comovement of average distance-to-default and portfolio distance-to-default. Secondly, this paper studies the determinants and the contagion mechanisms of systemic risk through combining the CCA method and spatial panel econometric method. We find that risk spillover effect measured by the spatial parameter is very significant even after controlling the macro-financial variables and bank-specific variables. Thirdly,this research analyzes the determinants and the contagion mechanisms of systemic risk through combining the CCA method and CCE method, especially study the spillover effects of "contiguity banks". In a word,the regulators should consider the contagion mechanisms and bank-specific variables of banks when we construct the macro-prudential management framework.