Impact of systemic risk in the real estate sector on banking return

Abstract

In this paper, we measure systemic risk in the real estate sector based on contingent claims analysis, and then investigate its impact on banking return. Based on the data in China, we find that systemic risk in the real estate sector has a negative effect on banking return, but this effect is temporary; banking risk aversion and implicit interest expense have considerable impact on banking return.

Assessing the contribution of China’s financial sectors to systemic risk

“…Our finding that following the financial crisis of 2007 the real estate sector has become one of the main sources of systemic risk, is consistent with Li et al (2016) who found that, in China, the real estate sector has become systemically relevant to the point that it affects bank returns. Moreover, it also highlights the increasing systemic importance of this sector, as showed also by Crowe et al (2013), given that real estate transactions involving borrowing can have disastrous consequences on the financial system and the real economy.…”

Can real estate regulatory policies constrain real estate risks to banks? Evidence from China

“…(2016) find that a lower growth rate of real estate investment increases bank instability, and this relation between real estate investment and bank instability is affected by real estate market cycles and the competition level of the regional banks. Li et al (2016) analyze the full-sample static effect of the systemic risk in the real estate sector on banking return in China and show that higher systemic risk in the real estate sector leads to lower banking return. Jiang and Äijö (2018) study the volatility connectedness across China's real estate firms and financial institutions and find that connectedness from real estate firms to banks decreased over the studied period.…”

Does Diversification Affect Banking Systemic Risk?

“…It is a framework that combines market-based and balance sheet information to obtain financial risk indicators, such as Distance-to-Default (DD), probabilities of default, risk-neutral credit risk premia, and expected losses on senior debt [20]. The CCA approach has been adopted to investigate banking systemic risk based on aggregated DD series [19][20][21][22][23]. Therefore, we also use the unweighted average DD series (ADD) and weighted average DD series (WADD) to measure banking systemic risk, where the weight is the individual market-capital weight.…”

“…In this paper, we focus on analyzing it from a technical-econometric point of view, which is useful to understand it from a different perspective. Similar to some studies [19][20][21][22][23], in this paper we measure banking systemic risk based on Contingent Claims Analysis. However, the purpose of this paper is different from theirs, and the novelties of this paper are as follows: the causal relationship from diversification to banking systemic risk is empirically tested; the causality tests are conducted within both linear and nonlinear frameworks; we conduct an empirical analysis for Chinese banking sector.…”