Risks’ cross-contagion between shadow banks based on complex network theory: evidence from China

Abstract

Purpose The purpose of this paper is to analyze the network path and internal mechanism of risks’ cross-contagion between shadow banks and design strategies for preventing risk infection between shadow banks. Design/methodology/approach Using the complex network theory, analyze the mechanism of risks’ cross-contagion between shadow banks from the credit network, business relationship network (BRN) and social network (SN); the cross-contagion mechanism using the structural equation model on the basis of China’s shadow banks is tested; based on the three risk infection paths, the prevention and control strategies for risk infection using the mathematical models of epidemic diseases are designed. Findings There are three network risk contagion paths between shadow banks. One, the credit network, risks are infected crossly mainly through debt and equity relationships; two, the BRN, risks are infected crossly mainly through business network and macro policy transmission; three, investor SN, risks are infected crossly mainly through individual SN and fractal relationships. The following three strategies for preventing risk’s cross-contagion between shadow banks: one, the in advance preventing strategy is more effective than the ex post control strategy; two, increasing the risk management coefficient; three, reducing the number of risk-infected submarkets. Originality/value The research of this study, especially the strategies for preventing the risks’ cross-contagion, could provide theoretical and practical guidance for regulatory authorities in formulating risk supervision measures.

Examining the interconnectedness and early warning signals of systemic risks of shadow banks: an application to the Indian shadow bank crisis

“…The high interconnectedness of shadow banks with commercial banks supports the regulatory arbitrage theory (Huang, 2018; Acharya et al ., 2013), making them systemically important. It also extended the work of (Fong et al ., 2021; Jin, 2021) in modeling the interconnectedness of shadow banks using the complex network. As the Indian shadow bank crisis is mainly due to many smaller institutions' simultaneous failures, it supports (Battiston et al.…”

“…Fong et al . (2021) and Jin (2021) analyzed interconnections and cross-contagion effects of shadow banks in between economies and financial sectors.…”

“…H€ ardle et al (2016), Demirer et al (2018) and Verma et al (2019) used a high dimensional network of financial institutions to combine tail event and network dynamics in one context. Fong et al (2021) and Jin (2021) analyzed interconnections and cross-contagion effects of shadow banks in between economies and financial sectors.…”

“…The cause of contagion in shadow banking resulting in Systemic risk of shadow banks spillover effect to the financial system is attributed to excessive reliance on short term debt (), opaque activities (Conlon et al, 2020;Ferrante, 2018), credit intermediation without explicit public insurance (Adrian and Ashcraft, 2016;Duca, 2016;Diamond and Dybvig, 1983;Pozsar et al, 2012), high leverage (Istiak, 2019) and regulatory arbitrage (Huang, 2018;Acharya et al, 2013;Gorton et al, 2010). Billio et al (2012), Fong et al (2021) and Jin (2021) showed empirically that beyond a threshold, interconnectedness can lead to contagion causing financial distress. Thus, we propose the following hypothesis in an out-of-sample study:…”