Interconnectedness and systemic risk measures of Chinese financial institutions

What is it about?

By the means of RAS algorithm, the interconnection among financial institutions are illustrated. Different methods, including Linear Granger, Systemic impact index (SII), vulnerability index (VI), CoVaR, and MES are used to measure the systemic risk exposures across different institutions.The results illustrate that big banks are more interconnected and hold the biggest scales of inter-bank transactions in the financial network. Banks have the largest number of interconnections, followed by insurance companies, security companies and other institutions. The institutions which have larger size tend to have more connection with others. Large amounts of fund transactions make state-owned banks play the most important role in the financial system. Insurance and security companies contribute more to the systemic risk where as other institutions, such as trusts, financial companies etc., may bring about severe loss and endanger the financial system as a whole. Due to the relatively small size, security companies have fewer interconnections in the market. However, their potential losses are predicted to be more than banks.

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Photo by Alina Grubnyak on Unsplash

Photo by Alina Grubnyak on Unsplash

Why is it important?

This study builds a valuable contribution by examine the systemic risks from the perspectives of both interconnection and tail risk measures. Furthermore; Four types financial institutions are investigated in this paper.Since other institutions with low levels of regulation may bring about higher extreme loss and suffer the whole system, it deserves more attention by regulators considering the contagion of potential risks in the financial system.

Perspectives