Liquidity Shocks?Systemic Risk And Banks' Risk Management Behavior—A Study Based On Complex Payment Net Among Banks

Since the 2008 global financial crisis, financial regulators paid more attention to the systemic risk in the financial system and switched their perspective from micro-prudential supervision to the macro-prudential orientation. According to "China's Five-Year Plan for National Economic and Social Development" It was necessary to establish a Counter-cyclical macro-prudential institutional framework and a sound financial risk prevention and warning system, "the Guiding Opinions on the Development of Payment Systems in China (2011-2015)" pointed out that safe and efficient payment system is conducive to prevent financial risks, strengthen public's confidence in the currency transfer mechanisms.Payment systems play a very important role in ensuring the safe and efficient transfer of deposits and financial instruments. Consequently, the failure of these systems may have a devastating impact. The importance of operational resilience is recognised in the Core Principles for Systemically Important Payment Systems developed by the G10 central banks (BIS,2001). In particular, Core Principle VII (CP VII) states that a system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.This paper assesses the effect of counterparties' reaction to an operational failure interbank payment system. Counterparties react according to two basic rules:they stop sending payments to the stricken bank either after some pre-determined time or after their Bilateral exposure to the other banks reaches a certain level.Complex networks theory simulation methods are means of this study. We compare the influence of the operational risk in different network structures and effect of different possible counterparty behaviors. We get following conclusion: First, under different network structures, the affecting of operational risk is different. In the RN network and FEN network, with the higher level of liquidity, even a small amount of liquidity injection, RN network and FEN network could complete most of the settlement. The reason is that RN network and global coupling network has a strong liquidity circulation, Second, In the event of operational risk in the BA network and RN network, the fuse mechanism obviously improves efficiency of payment system at the lower level of liquidity, But in the FEN network, fusing mechanism is invalid at any level of liquidity. Third, Bilateral limits is relatively inapplicable in FEN network and RN networks, Bilateral limits is more effective in payment system which most of payments are settled by few participants.Based on the results of empirical analysis, Even longer react time, the promotion of system efficiency is obvious, especially the level of liquidity is inadequate. So I think central banks could share information about participants' outages so as to allow banks to respond timely-although such transparency might be incompatible with confidentiality obligations. Banks might also be encouraged to communicate in a timely manner about their operational difficulties. In terms of bilateral limits, setting bilateral limits at a lower level than that actually observed in the system makes it possible to reduce liquidity loss in the event of a default, while having an insignificant impact if the system is functioning normally. The results of this study indicate that bilateral limits is more effective in the payment system which few members settle most of the payment.This paper systematically analysis the effects of extreme disruption in payment system under different network structures, and propose emergency mechanisms that participants could control their exposure levels to counterparty, achieving liquidity management.