Systemic Risk in China’s Interbank Lending Market

Abstract

We estimate an interbank lending distribution matrix, and then assume that the bankruptcy of a bank triggers a series of losses and other bank bankruptcies to establish an interbank bankruptcy chain network. We then analyze this network using the hyperlink-induced topic search (HITS) algorithm and identify the level of systemic risk. The empirical results show that there is no risk of systemic contagion in the interbank lending market in China. From the perspective of the lending market, China’s banking system is a network composed of core banks including the Bank of China and the Industrial and Commercial Bank of China, Level II banks including the Construction Bank of China, the Agricultural Bank of China, the Bank of Communications, the National Development Bank, and the Industrial Bank, and numerous Level III banks. Considering the influence of the entrance of nonbanking institutions into the interbank lending market, it is found that innovative online financial products have weakened interbank lending relationships to some extent and reduced the possibility of collective collapse caused by relation among banks in a crisis, and have thus facilitated risk diversification.