Bad Loans Induce Risk Contagion Among Banks

This paper constructs interbank ABM(Agent-based Model)to study the impact and impact of bad loans on the banking system.The biggest advantage of ABM is that it can mimic the reality of macro economy through micro behavior of individual banks.Specifically,first of all,the individual banks withdraw total investment and the return,bank cash flow increase.At the same time,bank deposits fluctuate randomly.Second,individual banks participate in bank clearing in the system.Individual banks get interbank lending back,return interbank borrowing,and collect or pay the corresponding amount of interest.When the liquidation is completed,the bank shall be insolvent as the bank's bankruptcy condition.At this point,the system eliminates the bankrupt banks and joins the new banks accordingly.Finally,individual banks make optimal investment decisions according to their capital adequacy ratio.At the same time,in order to avoid risks,the central bank requires commercial banks to hand over the required reserve.So,individual banks determine their liquidity direction.The Bank of liquidity needs financial support from the inter-bank market to the banks with surplus liquidity,and the interbank market provides a channel for the liquidity management of individual banks.If the individual banks cannot meet their liquidity needs through the inter-bank market,the current optimal investment plan will be reduced,so as to make the final determination of the current investment.At this point,the individual banks in a cycle of business activities go to end,the next step will repeat this business model.In this article,it should be pointed out that the variables that measure the liquidity index of banks are the cash reserves of banks.In the balance sheet of a bank,the assets include reserves,interbank lending,and total investment.The liabilities include deposits and interbank borrowing.The bank's equity is expressed as the difference between assets and liabilities.When a bank goes bankrupt because of insolvency,it also means that the bank's equity is less than zero.In the banking cycle,the balance sheets of individual banks are always updated and changed.In terms of accounting,the balance sheet of a bank is balanced at every moment.In order to study the impact of bad loans,we introduced bad loans shocks in the first stage.It should be noted that the bad loans in this paper is defined as part of the total investment of the bank.The existence of bad loans will reduce the bank's actual total investment,thereby reducing bank profits,reducing bank interest and reducing capital adequacy.Therefore,this paper makes a simulation of seven sets of experiments,through the total investment in the banking system,total equity,interbank borrowing,the average capital adequacy ratio,the number of bank failures,these indicators to statistics and observe the change of the banking system.The first four experiments in the experiment were used to analyze and compare the effects of bad loans on the system.The latter four sets of experiments are used to discuss the validity of bad loans treatment.In the first part,the first set of experiments simulated a banking system with no bad loans shocks,and the results show that the system is healthy and effective.The second and fourth experiments simulated the changes in the banking system under the fully connected network and the money center network.Both of them show that the impact of bad loans will lead to deterioration of bank assets,decrease of equity and total investment,and decrease of capital adequacy ratio.Moreover,the higher the bad loans rate in the banking system,the greater the extent of the deterioration,the more the number of failure banks,that is,the so-called "Domino effect",as well as,systemic risk.In view of the change of experiment two,we explain it by experiment three.Experiment three shows that the liquidity of the system changes through the interbank network after the bank suffers bad loans.At the same time,the higher the proportion of bad loans in the system,the worse the liquidity in the system,and then lead to liquidity risk contagion.Experiment four simulates the impact of bad loans shocks under the money center network.The experimental results show that the higher the bad loans rate,the greater the impact of the system.Moreover,for the whole banking system when the bad loans rate are the same,small banks are more vulnerable to risk shocks than the big ones.When the bad loans rate reaches a certain level,and it will lead to the collapse of big banks,the collapse of big banks will trigger widespread contagion.The experiment proved that "too big to fail","more connections than no fall".In the second part,the fifth to seventh sets of experiments in this paper simulate the effect of bad loans in the banking system under different bad loans rates.Here,the method of dealing with bad loans is to write off bad loans.It means to compensate the gap of bad loans through the bank's own equity or interests,and it should be pointed out that it is also a more cost saving method in dealing with bad loans.The experimental results show that when the default rate is low,that is lower than 6%,the banking system can be repaired by itself to eliminate the bad influence;when bad loans rate is high,that is higher than 8%,bad loans-written off does not make the banking system good in the short-term and long-term,then,we need to use other policy tools to save the banking system;when the rate of bad loans is in a certain interval,that is between 6%and 8%,the method can work out.To sum up,the policy of writing off bad loans is valid only in certain rate.