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Systemic Risk of China’s Financial System (2007–2018): A Comparison between CoVaR, MES and SRISK across Banks, Insurance and Securities Firms

Abstract China’s stock market crash in 2015 aroused scholarly attention on financial systemic risk in China. Using data on China’s stock market from January 5, 2007 to September 28, 2018, this study calculated three different measures of systemic risk, i.e., temporal fluctuation of financial institutions’ contribution to systemic risk (CoVaR), sensitivity of financial institutions to systemic risk (MES) and long-run expected capital shortfall (SRISK), to assess the formation, occurrence, and consequences of systemic risk in China. The results show that CoVaR and MES exhibited an abnormal rise during the outbreak of the 2008 global financial crisis and the 2015 domestic stock market crash, whereas SRISK showed a steady increase throughout the observation window, indicating China’s ever-growing SRISK despite the CoVaR and MES. More importantly, regardless of temporal fluctuation, (1) the vast majority of systemic risk comes from banks, followed by insurance firms, which is shown by the institutions’ ranking in terms of CoVaR; (2) securities firms followed by insurance firms are exposed to more systemic risk as indicated by short-run expected equity loss (i.e., MES); and (3) banks accumulate more SRISK than any other financial institution. The findings suggest that, in the event of a severe Chinese financial crisis, likely banks will endure the greatest amount of capital shortfall, whereas securities firms will suffer more short-run loss proportionally and thus risk a higher probability of bankruptcy. We conclude with a comparison of systemic risk in financial systems between China and the USA and policy implications.