Leverage and Systemic Risk Pro-Cyclicality in the Chinese Financial System

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 DCoVaR (Adrian & Brunnermeier, 2016), MES (Acharya et al., 2017), SRISK (Brownlees & 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 aspects 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.

Keywords: Leverage and systemic risk pro-cyclicality; Bank and non bank financial institutions; Panel data regression.

JEL Classification: C23, E3, G01, G15.