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The effect of the disposal of non-performing loans on interbank liquidity risk in China: A cash flow network-based analysis

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  • Jiajia, Liu
  • Kun, Guo
  • Fangcheng, Tang
  • Yahan, Wang
  • Shouyang, Wang

Abstract

The scale of non-performing loans (NPLs) directly affects the credit risk of commercial banks, and a large range of loan defaults will also lead to the liquidity crisis. Furthermore, liquidity risk will transmit to other banks through the interbank network. A reasonable disposal mode of NPLs is not only of great significance to commercial banks themselves, but is also related to the liquidity risk of the whole banking system. This paper fully considers the characteristics of China's banking system and constructs a dynamic bank-centered multi-agent model (DBMM) to explore how the disposal of non-performing loans (NPLs) affects interbank liquidity risk based on the interbank cash flow network. The results indicate that the increase in the number of small and medium-sized commercial banks improve the whole banking system stability, however, the increase in NPLs from low-income debtors increases the liquidity risk. The disposal of NPLs plays an important role in maintaining the stability of interbank networks, and the stock-plus-loan mode can more effectively alleviate liquidity risk in China than the entrusted settlement mode. Liquidation repayment ratio of commercial banks has the most significant effect on the interbank network in China, and adjusting this proportion is an effective method to prevent liquidity risk. Moreover, compared with small commercial banks, large commercial banks have a stronger ability to resist liquidity risk, as they are established with capital injection by the government in China.

Suggested Citation

  • Jiajia, Liu & Kun, Guo & Fangcheng, Tang & Yahan, Wang & Shouyang, Wang, 2023. "The effect of the disposal of non-performing loans on interbank liquidity risk in China: A cash flow network-based analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 105-119.
    • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:105-119
    DOI: 10.1016/j.qref.2023.03.005
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