Risk Contagion In Interbank Market Of China

As an important component of the financial system, banking plays a role which collect capital resources and then allocate them. Because of the particularity of banks, the outbreak possibility of a bank system crisis is very big and the economic damage caused by the crisis is enormous. One of the core elements affecting banking stability is the contagion of bank risk. Like infectious disease in medical science, contagion of bank can make the crisis of one bank spread all over the bank system and then trigger financial crisis.There are three channels for risk contagion in banking:interbank market channel, interbank payment system channel and information channel. This paper will research the risk contagion through interbank market channel. Interbank market plays a vital role in regulating fund surplus-deficiency and currency appreciation. Many institutions are willing to put short-term idle funds into this market in order to ensure liquidity, increase interest revenue and improve the balance sheet structure. Since its funding, the number of institution involved in interbank market has been increasing, and also the transaction scale. Now, interbank market has developed into an important trading floor for daily interbank transactions. But when this market comes into effect, it also greatly increases the risk relevance of bank system because of the complex asset-liability connection between banks. The risk of one or more banks will spread to other banks through the asset-liability connection. Not only credit risk can spread to other bank, but also liquidity risk.In order to estimate the matrix of bilateral credit relationship, balance sheet information of19commercial banks from2007to2012,matrix method and Lingo are used in this paper. The risk of one bank can result in the credit risk of creditor banks due to its defaulting and the liquidity risk of debtor banks due to its withdrawing in advance. Then, the breakdown banks result from contagion and the bank which is the source of infection will have negative effects on other banks simultaneously. The risk contagion will end up with no breakdown of other banks. Static and dynamic analysis are used to research the risk contagion effect of interbank market. The influencing factors of risk contagion and policy recommendations are given at last.