A Study On The Risk Spillover Between Chinese Banks

Since1980s, there has been Domino Effect that the whole bank systemundergone serious spillovers of risk, just because of the failure of a single or severalbanks. And the recent subprime crisis causes unprecedented losses and still does notend. Theory and practice show that in financial market,the risk that banksconfront,not just come from the bank itself, but also from other institutions, we callthis mechanism of volatility transmission Spill-Over Effect, and this effect is moreserious in recent crisis. Under Basel micro-prudential framework, especially in thetraditional VaR model as the core of risk management models, regulatory agenciesand banks only care about the risk faced by a single agency，do not show enoughconcern on Spill-Over Effect. When spillover accumulated to a certain degree,it isdifficult to avoid a huge loss for the entire banking system. With the gradual openingup of China’s financial market, especially the gradual increase of the businessrelationship including turnover and frequency of the various financial institutions, thenetwork structure between financial institutions increasingly becomes more complex.It is unavailable that a single bank can immune to the risk just from spillover of otherbanks. And once accumulated to an extent,the spillover effect could cause huge lossto the whole system. So not only from financial institutions risk management, but alsofrom a macro-prudential regulatory purpose, spillover effect is of great theoretical andpractical significance for the supervision of financial institutions.There has been many literature about measurement of spillover effect. Butthroughout the literature home and abroad, the main methods for measure is QuantileRegression, without concerning financial time series and their characteristics. Also,literatures on influencing factors of spillover effect are also less. Based on this,we useGARCH-t model to measure spillover effect and GMM model for influencing factoranalysis. This paper firstly describes the background and significance of the riskspillover effect and summarize the existing research results. Secondly, this paperreview research on spillover effect,especially on the measure and factor analysis.Then we describe general analysis of spillover effect in CHINA. Then, introducing theModel used in this paper, we calculate CoVaR of14listed banks. Next, controlling theeffect of macro-factor, our analysis stresses the effect of individual factors of banks.Our results show that profit feature and risk feature have a positive on spillover effect,and the size feature do not have a positive effect.