The Rising Systemic Importance of Chinese Banks: Should the World Be Concerned?

• Date: 01 December 2017
• Published date: 01 December 2017
• Author: Lin Mi,Necmi Kemal Avkiran
• DOI: http://doi.org/10.1111/1467-8462.12239

The Rising Systemic Importance of Chinese Banks: Should the

World Be Concerned?

Necmi Kemal Avkiran and Lin Mi*

Abstract

International regulators use data on systemic

importance for additional capital requirements

for banks with cross-jurisdictional operations.

Chinese banks’importance scores have risen

signif‌icantly and China stands as the world’s

largest net creditor. Furthermore, commercial

banks in China have recorded higher non-

performing loans ratios across 2013–2015.

Tracking systemic risk is a core activity in

enabling macroprudential regulation. We

focus on Chinese commercial banks and rank

them as domestic systemically important

banks (D-SIBs). We then identify those high

ranking D-SIBs that are also global systemi-

cally important banks (G-SIBs). We investigate

whether high ranking D-SIB/G-SIB banks have

adequate capital and their interconnectedness.

1. Introduction

According to the brief by the United States

Off‌ice of Financial Research (OFR2016), as of

2016 international regulatorsstarted using data

on systemic importance to prescribe additional

capital requirementsfor large banks with cross-

jurisdictional operations. The brief indicates

that while US bankscontinue to hold the highest

systemic importance scores at the global level,

Chinese banks’importance scores have risen

signif‌icantly. Three of the f‌ive global systemi-

cally important banks(G-SIBs), the importance

scores of which have risen the most were from

China; these are Bank of China, Industrial and

Commercial Bank of China, and Agricultural

Bank of China (OFR 2016), all large commer-

cial banks. In addition, with the Chinese

currency’s inclusion in the Special Drawing

Right starting on 1 October 2016 (administered

by the IMF), the role of Chinese banks in the

global economy is becoming more important.

Banks function in an intricately intercon-

nected global f‌inancial system. For example,

while the UK banking sector has a much larger

direct exposure to China when compared to the

United States ($531 billion against $148 billion

in 2015), the United States’exposure to China

is higher than indicated by direct calculations

because the United States is heavily exposed

to the United Kingdom at $477 billion

(OFR 2016). According to Calluzzo and

Dong (2015), it is diff‌icult to quantify systemic

risk or importance in integrated markets

and, furthermore, it changes dynamically.

Gart (1994, p. 134) def‌ines systemic risk as

the clear hazard by which diff‌iculties with the

operations of f‌inancial institutions can be

quickly transferred to others, including mar-

kets, and cause economic damage. As systemic

risk rises, distressed banks reduce lending to

* Avkiran and Mi: UQ BusinessSchool, The University of

Queensland, Queensland 4072 Australia. Corresponding

author: Avkiran,email <n.avkiran@business.uq.edu.au>.

The Australian Economic Review, vol. 50, no. 4, pp. 427–40

°

C2017 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd