Connectedness and systemic risk of the banking industry along the Belt and Road

Abstract

This paper adopts the tail-event driven network (TENET) framework to explore the connectedness and systemic risk of the banking industry along the Belt and Road (B&R) based on weekly returns of 377 publicly-listed banks from 2014 to 2019. We conduct the connectedness analysis from four levels (i.e., system, region, country and institution) and identify the systemic risk contribution of banks. We find that the dynamic total connectedness reached its peak during the outbreak of the abnormal fluctuations of Chinese stock market in 2015-2016 and its trough during the Brexit vote, and subsequently experienced several periodic fluctuations at a relatively high position. In the B&R banking system, the intra-regional tail risk spillovers are remarkably stronger than the inter-regional tail risk spillovers during the post-crisis period. In addition, the panel regressions estimated by the least squares dummy variable model show that the cross-border merger and acquisitions (M&As) and the merchandise trade export are important drivers for the tail-connectedness across the B&R countries. Our study provides regulators with insightful implications on the systemic risk supervision of the B&R banking industry.

Keywords

• G15
• G18
• G21
• G32