Macro financial fluctuation and China’s banking systemic risk: A financial cycle perspective

Low volatility in the stage of financial stability increases the accumulation of bank risk, and high volatility in the stage of financial instability increases bank risk, which is the formation procedure of financial systemic risk from the perspective of financial cycle. This paper firstly studies the forward-looking effect of low volatility of banking sector and macro finance on Chinese banks’ future systemic risk based on financial cycle theory. Then, this paper studies the risk spillovers between banking sector and macro financial system at different stages of the financial cycle based on the Financial Accelerator theory. Empirical results are as follows. 1) One bank’s risk accumulation has significantly long-term prediction on its systemic risk. 2) In the short-term perspective, except for the bond market, macro-financial volatility and bank’s systemic risk will increase and decrease simultaneously. In the long-term perspective, low macro-financial volatility has significantly impact on bank’s systemic risk after we control for the effect of high volatility. In addition, the long-term low volatilities in bond market and foreign exchange rate market increase bank’s systemic risk, while the long-term low volatility in the real estate market reduces bank’s systemic risk. 3) Financial Accelerator theory exists in both stages of the financial cycle, but this mechanism is more significant in the stage of financial instability. This paper provides valuable reference and monitoring tools for the proactive prevention of Chinese banking systemic risk. © 2023 Systems Engineering Society of China. All rights reserved.