Systemic Risk In Complex Banking Networks

Over a decade has passed since the collapse of the US investment bank,preventing and defusing systemic risk is still worldwide problems.General Secretary Xi Jinping pointed out at the Fifth Plenary Session of the 18 th CPC Central Committee:“The next five years may be a period when the risks facing all aspects of China’s development continue to accumulate or even emerge”.Furthermore,preventing and defusing major risks is once again given the top priority in fighting the three critical battles on the report to the 19 th National Congress of the CPC.“Preparation is the common way of the country”.Obviously,the prevention and mitigation of systemic risk has become a key policy priority in China,which has important theoretical and practical significance.The focus of this paper is on the third issues of systemic risk.Firstly,how to accurately measure and construct a network model of the interbank market which is suitable for China’s national conditions,and how to effectively identify systemically important banks and analyze the dynamic evolution of systemic risks? Secondly,whether the risk agglomeration of small and medium-sized banks will appear is the non-linear accumulation of risk and produce the “Emergence” phenomenon in the topology of indirect correlation networks formed by common assets,which leads to the rise of the systemic risk of banks,which will lead to the rise of the systemic risk of banks?Thirdly,focusing in the close financial connections of bank credit to the real economy,how to discuss the impact of supply chain disruptions in the real economy on systemic risks in the banking sector through a normative framework?Therefore,according to the research overview,this paper comprehensively examines the path and characteristics of risk infection caused by systemic network in banking industry,such as systemically important banks,small and medium-sized banks,credit network generated by supply chain enterprises and banks.Firstly,by introducing the minimum density method to deconstruct the bilateral risk exposure matrix,and we constructe the core-peripheral model that fits the hierarchy structure of interbank network in China combined with density estimation.On this basis,the correlation strength and weight between systemically important banks and other banks are empirically studied.The research shows that the core-peripheral model based on density estimation is a model that fits with China’s interbank network,and the dynamic composition of core blocks plays an important role in the network hierarchy of China’s banking industry;The evolution of systemically important banks in China is characterized by three stages of “Disorder-Diversity-Stability".During the financial turmoil,the density of non-diagonal blocks of the core-peripheral model continues to decline,and the connection weight of major systemically important banks in China is gradually weakened with the agglomeration of systemic risks.If the supervision is strengthened,the intensity and weight of connection will recover significantly.Secondly,besides the study of systemically important banks,considering both repayment risk and liquidity risk transmission channels,we also build a suitable banking system cascades failure theory model,so that we can consider the cascade failure of small and medium-sized banks.Combined with the reality data simulation,we can get specific bank failures and common impact of cascades failure on banks.China’s banking system includes “Too big to fail” and “Too many to fail”,and mutually independence,small banks compared to large banks can withstand lower boundary,less fluctuation,more prone to joint failures.Therefore,large banks are the first line of defense for many small and medium-sized banks,and the rescue cost can be much lower than large banks.Finally,besides investigating the interbank systemic risk contagion,this paper also consider the credit and production relations of commercial banks,and we construct a framework to study the bank systemic risk,which concludes the supply chain,downstream enterprises and family agents,so that the theoretical model of systemic risk contagion through the supply chain network is established,and the degree of systemic risk contagion caused by bank external shock and supply chain external shock is studied.The research shows that the systemic risk transmission channel with the overlapping supply chains characteristics exists in the banking system and is extremely vulnerable.Considering the susceptibility of commercial banks based on the common supply chain transmission channels,most city banks are high-frequency susceptible groups,followed by national banks;if not rescued,small interruption of the supply chains network may trigger large bank bankruptcies and interbank systemic risk contagion.Based on the above-mentioned studies,this paper puts forward the following main policy suggestions for preventing and defusing systemic risks in the banking industry.In the period of financial turmoil,the density index of core lending to the periphery has decreased,which is an early warning representation of systemic risk and needs to be focused on;To prevent and defuse major risks,the banks should be supervised at different levels according to the actual situation,and pay attention to the risk agglomeration phenomenon of many small and medium-sized banks and avoid the source of contagion,taking into account “Too big to fail” and “Too many to fail”,so as to realize the buffer evacuation and confrontation absorption of risks between banks.Tracing and strengthening the monitoring of the correlation of financial institutions and enterprises in order to find the best solution between credit transactions and systemic risk prevention.The primary contribution of the paper is mainly in three aspects:Firstly,complex banking networks suitable for China’s banking system are constructed through multiple channels.By introducing the minimum density estimation method to measure and hold the common supply chain credit relationship,the construction method of complex banking networks sre extended from the two aspects of direct correlation network and indirect correlation network;Secondly,the importance of banks and the banking cascade failures are multi-dimensionally investigated.we use the density estimation method to detect the core-peripheral structure and identify systemically important banks based on the core block dynamic composition in the core-peripheral network model,and further we propose a cascading failures model in complex banking networks,so as to measure the systematic importance of small and medium-sized banks;Thirdly,Preventing banking systemic risk across multiple perspectives.By introducing the research perspective of holding the common supply chains,we analyze the risk transmission in the banking system and the real economy supply chain,and detect potential channel of systemic risk impact in the banking industry,which has practical guiding significance.