Bank network structure and systemic financial risk contagion

YANG Ke, WANG Jianchen, TIAN Fengping

Systems Engineering - Theory & Practice ›› 2024, Vol. 44 ›› Issue (7) : 2120-2136.

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Systems Engineering - Theory & Practice ›› 2024, Vol. 44 ›› Issue (7) : 2120-2136. DOI: 10.12011/SETP2023-2366

Bank network structure and systemic financial risk contagion

  • YANG Ke1,3, WANG Jianchen1, TIAN Fengping2
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Abstract

With the expanding capital scale and membership in China's banking industry, the increasingly complex inter-institutional network has emerged as a potential risk contagion channel. Employing the GARCH-Copula-CoVaR model, this paper measures the contribution of 16 listed commercial banks to systemic financial risk. Integrating network topology theory and the sliding window method, we study the evolution of banking network structure characteristics and analyze their influence on the transmission mechanism of systemic financial risk. While the "decentralization" effect of the banking sector has grown significantly, enhancing overall network stability and risk resistance, it remains crucial to recognize the diverse roles played by network structure characteristics in systemic risk generation and radiation. Banks in different risk contagion positions are key players in the contagion process. Banks in different risk-transmitting positions face varying challenges in meeting both micro-prudential and macro-prudential requirements. Banks sensitive to extreme risks and occupying central roles in the network are inclined to export more risks to the entire system, often leading in the risk transmission process. During crises, network density undergoes drastic changes, and imbalances in relationship network stability expedite the contagion of systemic financial risk. This study proposes ideas for regulators to update the list of systemically important banks in real time and comprehensively supervise risk contagion channels, significantly enhancing the financial market's resilience to risks and mitigating systemic risks.

Key words

bank network structure / systemic financial risk / mechanisms of influence

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YANG Ke , WANG Jianchen , TIAN Fengping. Bank network structure and systemic financial risk contagion. Systems Engineering - Theory & Practice, 2024, 44(7): 2120-2136 https://doi.org/10.12011/SETP2023-2366

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Funding

National Natural Science Foundation of China (72201284, 71991474); Humanities and Social Sciences Foundation of Ministry of Education of China (22YJA790077); Guangdong Basic and Applied Basic Research Foundation (2024A1515011002); Fundamental Research Funds for the Central Universities (QNTD202305)
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