Abstract
Considering two risk contagion channels, namely interbank lending and common asset holdings, we introduce the bank's default probability into the DebtRank model to construct an improved one and measured the bank’s systemic risk using the data of China's banking industry from 2016 to 2018. The research results indicate that the bank’s systemic risk from two risk contagion channels is significantly greater than the sum of risks from every single channel. The original DebtRank that takes only a single risk contagion channel into account will underestimate the bank’s systemic risk. In addition, state-owned commercial banks and joint-stock commercial banks are the risk centers of China's banking system, whose systemic importance changes dynamically. Furthermore, the ranking of the TLAC gaps show correlation with the ranking of the DebtRanks of Chinese G-SIBs. The results of this paper will provide a new way and a theoretical basis for identifying systemically important banks and strengthening the supervision of the banking system.
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Notes
The algorithm of improved DebtRank model is shown in Fig. 5 of “Appendix A”.
The interbank lending matrix is constructed by the method proposed by Cimini et al. (2015); this method overcomes the shortcomings of the full network connection of the maximum entropy method and can better estimate the interbank lending relationship. It is widely used in the construction of interbank lending relationship (Bardoscia et al., 2015; Cimini and Serri 2016). The specific method can refer to Cimini et al. (2015).
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Appendices
Appendix A
See Fig.
Algorithm of the improved DebtRank model
5.
Appendix B
The equities of bank \(A\) and bank \(B\) are both 1, the interbank asset from bank \(A\) to bank \(B\) is 0.5, both bank \(A\) and \(B\) hold asset \(C\) with value of 1, the default probability of bank \(B\) is 0.01, the economic values of banks \(A\) and \(B\) are \(\frac{1}{1 + 1 + 0.5} = 0.4\) and \(\frac{0.5 + 1}{{1 + 1 + 0.5}} = 0.6\) respectively. The ratio of the equity loss caused by bank \(B\)'s default through interbank lending to bank \(A\) is \(1 \times 0.5 \times 0.01 = 0.005\). Assuming that bank \(B\)'s default to sell asset \(C\) causes the price of asset \(C\) to drop by 0.005, the ratio of the equity loss caused by bank \(B\)'s default through common asset holdings to bank \(A\) is \(0.005/1 = 0.005\), and the DebtRank of bank \(B\) is \(\left( {0.005 + 0.005} \right) \times 0.4 + 1 \times 0.6 - 0 \times 0.4 - 1 \times 0.6 = 0.004\).
Appendix C
See Table
5.
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Wang, H., Li, S. Identifying Systemically Important Banks Based on an Improved DebtRank Model. Comput Econ 62, 1505–1523 (2023). https://doi.org/10.1007/s10614-022-10309-8
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DOI: https://doi.org/10.1007/s10614-022-10309-8