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Leverage and systemic risk pro-cyclicality in the Chinese financial system

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  • Cincinelli, Peter
  • Pellini, Elisabetta
  • Urga, Giovanni

Abstract

In this paper, we investigate the relationship between balance sheet size and leverage (i.e., leverage pro-cyclicality) and the pro-cyclicality of systemic risk using three systemic risk measures such as ΔCoVaR (Adrian and Brunnermeier (2016)), MES (Acharya et al. (2017)), SRISK (Brownlees and Engle (2016)). We conduct an extensive panel data analysis using a sample of 264 Chinese listed financial institutions (43 commercial banks, 74 finance services and 147 real estate finance services) over 2005:4–2019:4. We also study the impact of different phases of the financial turmoil by considering three subperiods, the “Global Financial Crisis” (2007:1–2009:4), the “Monetary Policy Restriction” (2010:1–2014:4), and the “2015 Chinese Stock Crash” (2015:1–2019:4). We find that leverage pro-cyclicality mainly affects CBs, in particular during the global financial crisis and the monetary policy restriction. We also find that larger financial institutions increase systemic risk, in particular commercial banks, which from 2016 started increasing shadow banking activities, and the real estate financial services with their activity closer to commercial banking.

Suggested Citation

  • Cincinelli, Peter & Pellini, Elisabetta & Urga, Giovanni, 2021. "Leverage and systemic risk pro-cyclicality in the Chinese financial system," International Review of Financial Analysis, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002210
    DOI: 10.1016/j.irfa.2021.101895
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    Cited by:

    1. Cincinelli, Peter & Pellini, Elisabetta & Urga, Giovanni, 2024. "Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe," International Review of Financial Analysis, Elsevier, vol. 94(C).
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    4. Kurter, Zeynep O., 2024. "How macroeconomic conditions affect systemic risk in the short and long-run?," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    5. Bellavite Pellegrini, Carlo & Cincinelli, Peter & Meoli, Michele & Urga, Giovanni, 2022. "The contribution of (shadow) banks and real estate to systemic risk in China," Journal of Financial Stability, Elsevier, vol. 60(C).
    6. Cincinelli, Peter & Pellini, Elisabetta & Urga, Giovanni, 2022. "Systemic risk in the Chinese financial system: A panel Granger causality analysis," International Review of Financial Analysis, Elsevier, vol. 82(C).
    7. Mikhail Stolbov & Maria Shchepeleva, 2023. "Sentiment-based indicators of real estate market stress and systemic risk: international evidence," Annals of Finance, Springer, vol. 19(3), pages 355-382, September.
    8. Wu, Feng-lin & Zhou, Jia-qi & Wang, Ming-hui, 2024. "The writing on the wall: A connectedness-based analysis of ownership structure and bank risk in China," International Review of Financial Analysis, Elsevier, vol. 95(PB).

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    More about this item

    Keywords

    Leverage and systemic risk pro-cyclicality; Bank and non bank financial institutions; Panel data regression;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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