Journal of Risk Model Validation

Risk.net

Risk contagion and bank stability: the role of credit risk and liquidity risk

Lei Ding, Yaming Zhuang and Hu Wang

  • The authors propose a systemic risk measurement model based on the credit and liquidity channels.
  • Credit risk is found to be the main source of systemic risk in China’s banking system.
  • It is demonstrated that systemic risk can be lowered by reducing large single exposures.

Financial crises have shown that credit risk and liquidity risk have an important impact on the stability of the banking system. Considering both credit risk and liquidity risk, we propose a systemic risk measurement model and measure systemic risk in banking by using 2013–18 data for China’s banking sector. Our results show that taking into account the two risk contagion channels together gives a significantly higher value of systemic risk in the banking system than when summing the credit and liquidity contagion channels individually. Credit risk is the main source of systemic risk in China’s banking system. Systemic risk can be lowered by reducing large single exposures. An increase in the credit guarantee ratio and the cash ratio can reduce systemic risk in banking, and the cash ratio is more efficient at reducing such exposure than a credit guarantee.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: