Competition And Systemic Risk In Chinese Banking:An Empirical Study

The banking industry is an enormous sector of business and finance and it is also one of the most important pillars of the entire financial system.Setting effective and efficient monitoring of banking risks and obtaining financial stability has always been a consensus amongst the worldwide regulatory authority.The relationship between banking risk and competition recently has been a controversial issue both among policy makers and academics.Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks,this paper attends to the systemic risk and bank competition and comes out rare conclusion.On the basis of literature review,this paper studies several theoretical methods for measuring the level of bank competition and systemic risk.To conduct an empirical analysis upon the relationship between bank competition and systemic risk,Lerner index and SRISK index are introduced and this paper gives detailed calculation of both indexes.Using the sample of Chinese listed banks from 2007 to2015,the results show robust negative relationship between bank competition and systemic stability,which is in line with the "Competition-Stability" theory.Examining the impact of the bank competition shows that banking systems are more fragile with high market power and public policies that restrict competition.This can be explained by the fact that weak competition tends to increase the correlation in the risk-taking behavior of banks.To sum up the findings,this paper points out several suggestions that the regulatory authority should not only pay attention to systemic risk and set an alarm of accumulated risks,but also reach a balance between individual and systemic risk.