Research On The Conduction Mechanism Of Liquidity Risk In China's Banking Industry

Commercial banking business has developed from the traditional deposit and loan to various types of complex financial services,liquidity risk easily through the balance sheet and asset price contact between each other.The interconnection between money market and capital market improves the fund utilization rate and realizes the joint development of money market and capital market.However,the risks in one market will spread to other markets through cash flow.According to the research on the previous financial crises,the breakout of regional and global financial crises is owing to cross-market risk contagion.Once breaking out in one market,the risks will spread to other markets like wildfire through risk contagion effect.With more financial institutions participating in Chinese inter-bank market,constantly expanding Chinese interbank market scale and closer business relationship between banks,if one bank goes bankrupt out of emergency events,the liquidity crunch in this bank will spread to the entire interbank market like wildfire.Therefore,once the liquidity risk breaks out in the money market,which is the main supplier of liquidity for the financial market,it will spread to the entire financial market,causing the financial turbulence.This paper first combs both domestic and foreign literature on risk contagion in the interbank market and summarizes the internal and cross-market risk contagion mechanism for the interbank market.Then this paper empirically analyzes the price spillover effect of the interbank market on that of the stock market and bond market in China.The empirical results indicate that there is price spillover effect between interbank market and capital market in China in times of crisis.The connection between the interbank market and capital market in China will be closer in times of crisis and the bond market is more vulnerable to the risks in the interbank market.Lastly,this paper uses sample data of loans and deposits of 29 Chinese major commercial banks in 2014 and the information entropy optimal matrix method to calculate the credit and debt matrix of 29 banks under the most stable conditions and simulate the internal risk contagion out of one bank's bankruptcy.They also show that Chinese banking system has relatively high stability.Large commercial banks' bankruptcy produce stronger impacts on the banking system than medium and small banks',and medium and small banks don't produce any impact despite their poorer risk defense ability.