Macro stress testing in the banking system of China

Jiang, Bo and Philp, Bruce and Wu, Zhongmin (2017) Macro stress testing in the banking system of China. Journal of Banking Regulation. pp. 1-12. ISSN 1745-6452

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Abstract

In this paper we develop a framework for macro stress testing of China’s banking system. Our estimates of the correlations between banks’ stability indicators and macroeconomic factors establish significant relationships between the non-performing loan ratio and key macroeconomic variables, such as GDP growth, the retail price index (RPI), the unemployment rate, total fixed investment, the money supply, interest rates, and exchange rates. Further, results from the macro stress tests show that robustness, or otherwise, of the banking system is highly dependent on the source of the potential risk. Our value-at-risk tests suggest that (at a 99% confidence level) the Chinese banking system is robust with respect to interest rate shocks. However, GDP growth and exchange rate shocks exhibit a profound negative effect, indicating that significant losses become likely. These results should inform investors, policy-makers and regulators with regard to loss-limitation in China’s banking system.

Item Type: Article
Subjects: L100 Economics
N300 Finance
Divisions: UoA Collections > REF2021 UoA17: Business and Management Studies
Depositing User: Bruce Philp
Date Deposited: 05 Feb 2018 09:47
Last Modified: 06 Feb 2018 16:09
URI: http://www.open-access.bcu.ac.uk/id/eprint/5604

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