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Real estate bubbles in a bank-real estate loan network model integrating economic cycle and macro-prudential stress testing

Author

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  • Wang, Lei
  • Li, Shouwei
  • Wang, Jining
  • Meng, Yi

Abstract

The real estate industry plays a decisive role in the national economy. Once real estate bubbles burst, it will trigger the turbulence of the whole economic system and even lead to serious economic crisis. From the perspective of macro-prudential stress testing, this paper constructs a risk contagion model of bank-real estate loan network. With the help of the data of 136 banks that provided loans for the real estate industry from 2012 to 2017, a macro-prudential stress testing is conducted on the bank-real estate loan system and real estate bubbles. The main conclusions are as follows: (1) Asset depreciation coefficient, bank panic coefficient and bank leverage rate have little impact on the stability of the banking system and the state of real estate bubbles, but the scale of bank assets has a significant impact on them in the whole economic cycle. (2) During the recession period, when China’s banks that are “too big to fail” have not been subjected to excessive shocks, the entire banking system will remain relatively stable and real estate bubbles will not burst. (3) Compared with the recession period, the bank survival ratio is higher under the influence of asset depreciation coefficient, bank panic coefficient and bank leverage rate in the recovery period. And the probability of the system being completely robust increases under the influence of the scale of bank asset, while the probability of being extremely vulnerable decreases. (4) Compared with the recession and recovery period, the bank survival ratio is higher under the influence of asset depreciation coefficient in overheating period, and it is lower under the influence of bank panic coefficient and bank leverage rate. Moreover, under the influence of the scale of bank assets, the probability of the system being completely robust increases, while the probability of being extremely vulnerable decreases. (5) The banking system has significant hierarchical and functional differences in China. It reflects that China should focus on large state-owned banks and joint-stock banks when preventing real estate bubbles from breaking up.

Suggested Citation

  • Wang, Lei & Li, Shouwei & Wang, Jining & Meng, Yi, 2020. "Real estate bubbles in a bank-real estate loan network model integrating economic cycle and macro-prudential stress testing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 542(C).
    • Handle: RePEc:eee:phsmap:v:542:y:2020:i:c:s0378437119314748
    DOI: 10.1016/j.physa.2019.122576
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    2. Weiwei Li & Lisheng Weng & Kaixu Zhao & Sidong Zhao & Ping Zhang, 2021. "Research on the Evaluation of Real Estate Inventory Management in China," Land, MDPI, vol. 10(12), pages 1-29, November.
    3. Han, Yang & Zhang, Haotian & Zhao, Yong, 2021. "Structural evolution of real estate industry in China: 2002-2017," Structural Change and Economic Dynamics, Elsevier, vol. 57(C), pages 45-56.

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