Enforcement actions and systemic risk

Abstract

Enforcement actions aim to strengthen financial stability, and China has gradually bolstered the intensity of its own related actions. This research manually sorts out the enforcement action decision documents published by the China Banking and Insurance Regulatory Commission one by one, constructs micro-level enforcement action indicators, uses $△\mathrm{CoVaR}$ and connectedness, and empirically examines the relationship between enforcement actions and banking systemic risk from global and connectedness perspectives. We find that enforcement actions reduce systemic risk in banks and have a continuous reduction effect within three quarters after their initiation. The reduction impact of enforcement actions on connectedness is only reflected after two quarters of initiation. In addition, we adopt the $△\mathrm{CoVaR}$ decomposition method and find that enforcement actions significantly reduce the tail risk of banks and lower their interconnectedness, but with a time lag effect. Lastly, we evaluate the systemic risk of enforcement actions on different types of banks and note that they substantially reduce such risk in high-capital and state-owned banks more than in low-capital and joint-stock banks.