Network Analysis For Conduction Channels Of Systemic Risk In Commercial Banks

Because of the need to avoid the risks and other aspects of daily transactions,commercial banks depend on each other in a complicated way.It is just because of such relationships that the important role of the network structure has been emphasized.Network structure is even thought to play a central role in the formation of systemic risk,and lead to deterioration of the stability of the banking system.Complex network structure will also enlarge existing market friction,leading to asymmetric information and negative external effects.Therefor the network analysis in recent years has become the forefront of the systemic risk research.Bank network structure provides both a direct and an indirect route for the systemic risk.In addition,the different characteristics of the banking network nodes impact the systemic risk in a different way.Thus network analysis are essential for systemic risk and financial regulation.As network anylysis become widespread,it has become an important perspective of the system risk research.This paper attempts to expand the traditional way of research"contagion effect-systemic risk" to "contagion,correlation effectssystemic risk".Not only we clarify the role played by network structure,but also the relationship between conduction channel and systemic risk is clear.It provides new ideas for the study of the banking system and the risk control behavior.This paper reviews the impact of shocks,the concept of contagion and correlation,and then the conduction channels are divided into contagion channel and correlation channel.The analysis for systematic risk contained mathematical analysis and empirical analysis,which reveals"how conduction channels affect the stability of system" and "to what extent the impact is".In terms of research,this paper contains a mechanism analysis,mathematical analysis and empirical analysis.mechanism analysis refers to analysis for formation of conduction channel and networks;mathematical analysis refers to issues such as fraction of default?resillience and stress-testing;Empirical analysis estimates the matrix for China' banking system and draw some numerical conclutions.The conclution of mechanism analysis tells that:The effect of Idiosyncratic Shock declines as it spreads,while the Common Shocks does the opposite.Both of which are affected by the network structure.Endogenous network formation analysis reveals that:first,there may be exist a Lucas Critique;second,Banks' individual objectives deviates from the one of "social planner";third,Core-periphery structure is more realistic for general research.Mathematical analysis is based on the Law of Large Numbers.We conclude that:characteristics of network structure and Balance Sheet are both factors that affect the fration of default problem.while the resillence of banking network are decided by potential contagious links.finaly,the stress-testing problem is tackled by adding correlation factors.By comparing Mathematical analysis and numerical simulation,the two method lead to the same result.Empirical Analysis measures the extent to which the conduction channel affect the banking system.First,we estimate the bilateral matrix of banks in China,which would be the base for our analysis.Then,we calculate three index——contagion index,correlation index and conduction index.All of the three index measure different numerical impact banks impose on the whole system.The outcome holds that contagion index could be several times larger than the interbank liability;And banks were ranked by their conduction index as a metrics for systemic importance.Top five of the banks were Bank of China,industrial and Commercial Bank of China,industrial bank,construction bank,Agricultural Bank.System importance ranking meas that if these banks fail the whole banking systemic would be deeply harmed.According to the outcome of this research,Assess Systemically important banks,we need to consider three factors:Network structure,contagion channels and correlation channel.The conduction index would become an excellent measurement which takes the three factors into account.Therefore,it would contribute a lot to the existing research on systemically important banks...