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Macro stress testing in the banking system of China

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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 nonperforming loan ratio and key macroeconomic variables, such as GDP growth, the retail price index, 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.

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Notes

  1. The notion of stress testing—which was originally developed in medicine [3]—has emerged as both an ex-ante risk management tool for identifying vulnerability ahead an extreme shock, and a crisis management and resolution tool [4, 5].

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Authors and Affiliations

  1. Nottingham Trent University, 50 Shakespeare Street, Nottingham, NG1 4FQ, UK

    Bo Jiang, Bruce Philp & Zhongmin Wu

Authors
  1. Bo Jiang
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  2. Bruce Philp
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  3. Zhongmin Wu
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Corresponding author

Correspondence to Zhongmin Wu.

Appendix

Appendix

See Table 8.

Table 8 Lag length criteria
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Jiang, B., Philp, B. & Wu, Z. Macro stress testing in the banking system of China. J Bank Regul 19, 287–298 (2018). https://doi.org/10.1057/s41261-017-0057-9

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