A Study On The Contagion Effect Of Interbank Market Risk In China From The Perspective Of Networks

As the main part of the financial industry,banks play a significant role in the accumulation and redistribution of funds.As we know,individual banks do not operate independently,but they all create a complex network with creditor's right and debts through the interbank market.This kind of relationship accumulate potential risk constantly.It would trigger a series of contagion effect and bring great impact to the whole banking system,once the risk breaks out.Nowadays,China's economy has entered the “new normal” period that has a profound impact on the development of banking industry which is interdependent with economy,especially the interbank market.As the China's interbank market continues to grow,the banking system faces greater potential risks.Therefore,it's particularly important for maintaining the security and stability of China's banking system to study the mechanism of interbank risk contagion and the risk prevention and control of interbank business.Reviewing lots of research achievements on the risk contagion among banks from home and abroad before this paper starts.Firstly,it cards the basic theories of the risks,the channels of contagion and the mechanism of contagion among banks.Subsequently,it selects the most practical and widely used matrix method regarding the available data and capabilities,after concluding various methods of risk contagion measurement model.Then taking interbank market as the main object of study,and selecting the data about interbank lending,interbank deposits and other data which is disclosed in annual reports of 67 banks in China from 2014 to 2016.Based on the principle of maximum entropy to solve the bilateral risk exposure matrix of bank market in China,so as to construct the relationship matrix of credit lending between banks with LINGO software.Then,according to the requirements for the quality and quantity of bank capital in continuous operation in “Basel III” as the judgment standard whether a bank would survive after being infected.And uses MATLAB software to simulate the risk contagion effect in each situation(i.e.,crisis number and capital losses)at different default loss rate in different scenarios of initial bankruptcy banks.This paper also goes deep into the micro level of risk contagion,like listing individual banks infected in each round of risk contagion in each case and analyzing the characteristics of those banks like interbank scale and capital adequacy to decompose the general nature of the vulnerability of banks to contagion.Finally,we compare from time latitude and discuss the trend of the stability of China's banking system.According to the simulation results,the main conclusions are as follows: 1.BOC and CBC as systemically important banks,their bankruptcy would cause serious damage to the banking system;2.City Commercial Banks and Rural Commercial Banks are more susceptible to contagion and fall into crisis;3.Banks which fall into crisis by risk contagion are related to their interbank assets scale,capital adequacy ratio and net capital.The larger the scale of interbank assets and the smaller the capital adequacy ratio,the more likely they would be infected and in crisis;4.The multi bank insolvency brings greater crisis to the banking system than single bankrupt,which is related to the interbank liabilities scale and the default loss rate;5.Once the risk is formed,the more rounds of infection,the greater damage to the banking system.