Interbank Markets in China and US

What is it about?

We compare the contagion risk in the interbank market between China and the United States during the period from 2011 to 2013. Applying simulation method, we find that the contagion risk of an individual bank shock in the US interbank market is relatively lower than that in China during the period. For a group bank shock, we find that the group with the lowest capital adequacy ratio in China induces a serious contagion, while the group with the highest concentration degree in the US induces a mild contagion. One potential reason is that the additional capital of most commercial banks in China is relatively lower than that of the US and most banks in China highly depend on the interbank market for acquiring liquidity or income.

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Why is it important?

We use a modified simulation method to investigate and compare contagion risk in the interbank market between China and the US. We propose a modified formula of capital adequacy ratio to contagion risk. According to Basel III. We evaluate contagion risk in the interbank market by the single shock and by special group shocks. Our results show that differences in the interbank structures, and in the additional capital ratio are important factors in resisting contagion risk in the interbank market in China.