Study On Contagion Effect Of China’s Inter-Bankmarket Risk

In 2008, the global financial crisis broke out. Since then, many national regulatory agencies and international financial organizations paid more attention to risk contagion. Seemingly healthy individual banks instantaneous collapsed, leading to the breakdown of the entire banking system, thereby causing serious impact on the real economy. Banking which operates currencies is a special industry, and it’s vulnerable to uncertainty and loss. Various banks in the inter-bank market hold mutual debts, this contact way can easily lead to a chain reaction of local risk and let the risk quickly pass on the entire banking system, trigger "domino effect" and bring enormous damage to the economy. Therefore, studying on contagion effect of China’s inter-bank market risk, identifying potential infection paths of risk, discovering the source of risk have great theoretical and practical value.This paper is based on the perspective of inter-bank market’s risk contagion, and studies the infection process of the credit risk through lending channels, then determines the soundness of the bank’s own business and assesses the role in the system. First of all, the paper summarizes existing research on risk contagion, and then presents theoretical mechanism of risk contagion and introduces the thought of bank clearing according to the theoretical basis. The next job is to simulating external shocks, referring to the clearing rules and process of the bank, and getting balance payment at steady state. Based on this process, the paper researches each bank’s liquidity situation before reaching steady state, finds the transmission path between banks according to the order of the banks which have liquidity difficulties. After reaching steady state, we construct index like payment difficulties, asset recovery and other indictors to measure the impact of shock. Then, in order to identifying the important banking institution, we analyze the anti-risk capability and robustness of each bank. Finally, the paper finds the potential factors which affect the soundness of banking institutions and identifies systemically important banks, then puts up few specific recommendations to preventing bank risk and strengthening banking supervision.This paper studies 40 sample banks and selects data from the year of 2012,2013,2014. The study finds that an external shock can cause the banking system appear risk source, and credit risk transfers through institutional lending linkages. With the process of risk contagion, new banks have difficulties. When the system reaches a steady state, the recovery of the bank’s assets decreases when compared with the initial state. And once the loss from inter-bank debt is bigger than a certain percentage of bank’s core capital, the bank has trouble in repaying. Large banks play an important role in the banking system, like ICBC, CCB, BOC and CDB are systemically important banks. Banks which hold more liquidity, more dispersed assets and sufficient core capital are less prone to operational difficulties. Once the bank is unable to digest and absorb losses, the risk will affect more banks.Combining theoretical analysis and empirical results, this paper gives four suggestions in order to improve the robustness of the bank. Like maintaining adequate liquidity, dispersing trading, focusing on management of core capital and adopting multi-channel investment. From two aspects, controlling the source of risk and blocking the contagion channel, the paper proposes some advice to limiting the risk contagion and preventing system crises.