Measuring Financial Fragility in China

40 Pages Posted: 18 Dec 2015

See all articles by Kwangwon Ahn

Kwangwon Ahn

KAIST

Jacqueline Dai

Peking University - HSBC School of Business

Chansoo Kim

Korea Institute of Science and Technology Information (KISTI)

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Date Written: August 23, 2015

Abstract

This paper proposes a metric for a financial fragility index for the Chinese banking sector. This metric is a weighted average of two variables: bank profitability and multiple probability of undercapitalization. The weights of the two variables are assigned based on their effects on real output, estimated by a vector autoregressive model. The main contribution is two-fold: incorporating a capital adequacy ratio into a quantitative measure and aggregating insolvency risk through a multiple probability measure. We confirm that our metric successfully identifies three periods of financial turmoil accompanied by economic downturns and rules out one minor perturbation caused by side effect of the policy between 2007 and 2014. In particular, this study provides an economic rationale for the relationship among financial instability, policy, and economic activity.

Keywords: Chinese economy, financial fragility, insolvency risk

Suggested Citation

Ahn, Kwangwon and Dai, Jacqueline and Kim, Chansoo and Tsomocos, Dimitrios P., Measuring Financial Fragility in China (August 23, 2015). Saïd Business School WP 2015-23, Available at SSRN: https://ssrn.com/abstract=2683329 or http://dx.doi.org/10.2139/ssrn.2683329

Kwangwon Ahn (Contact Author)

KAIST ( email )

2250, Bldg. N5, KAIST
291 Daehak-ro, Yuseong-gu
Daejeon, 34141
Korea, Republic of (South Korea)

Jacqueline Dai

Peking University - HSBC School of Business ( email )

University Town
Shenzhen, 518055
China

Chansoo Kim

Korea Institute of Science and Technology Information (KISTI) ( email )

Hwarangno 14-gil 5
Seongbuk-gu
Seoul, 136-791
Korea, Republic of (South Korea)

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

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