Commercial Banks the Biggest Agents of Systemic Contagion: PBOC


A new essay published by the Chinese central bank contends that certain joint-stock commercial banks have become systemically important financial institutions, and could play a greater role in transmitting malaise through the financial system than the big state-owned banks.

The essay entitled “The Transmission of Financial Shock Between Chinese Financial Institutions Under a Global Perspective” (全球视角下的中国金融机构间金融冲击传递) purports to represent the first comprehensive study of of how shock might spread between Chinese financial institutions, as well as the various factors impacting transmission.

Commercials banks more important than state-owned giants during crisis

Contrary to the conventional viewpoint, the essay says that joint-stock commercial banks could play an even greater role than China’s big four state-owned banks in transmitting the effects of any financial shocks.

PBOC researchers used measures of the “net influence” and “influence to others” of financial institutions during the transmission of shocks to the financial system to assess the systemic importance of individual lenders.

By means of this method the study determined that Bank of Communications, Bank of Ningbo, China Merchants Bank, Huaxia Bank, Industrial Bank Co., Ping’an Bank and Shanghai Pudong Development Bank could all potentially be defined as systemically importance financial institutions (SIFI).

PBOC’s research further indicates that during periods of market upheaval, such as the 2008 GFC and the sharp fluctuations in China’s share market in 2015, the big four state-owned banks have a net positive influence on the financial system, yet a net negative influence during periods of stability.

Non-bank financial institutions become increasing important

PBOC research also indicates that banks are increasingly affectedly the actions of non-bank financial institutions, putting the average level of influence at 30%.

The figure attests to the burgeoning growth of China’s shadow banking sector, which has arisen partially as a result of the regulatory constraints imposed upon conventional lenders, as well as the continually increasing importance of non-bank financial institutions

According to the PBOC essay, the authorities must give greater attention to non-bank financial institutions should they wish to raise the effectiveness of financial regulation.

It notes that rising interrelations between financial institutions can cause the crises suffered by an extremely small number of companies to rapidly spread throughout China’s entire financial system, and calls for measures including the establishment of effective financial and risk regulatory systems as well as asset pricing mechanisms.