Cros-border Capital Flow and the Systemic Risk of Commercial Banks

Abstract

Leveraging cross-border capital to increase capital is a crucial strategy for fostering the high-quality development of China’s economy. However, it is imperative to carefully consider the impact of such capital flows on the systemic risk of commercial banks. This study delves into the nuanced relationship between cross-border capital flows and the stability of commercial banks, offering essential insights on how to cope with such impacts while advancing financial openness and safeguarding China’s financial stability and development. Equally important is the dual circulation of domestic and international economic activities, which mutually reinforce one another. The existing body of research lacks a unified understanding of how cross-border capital flows affect the systemic risk of commercial banks. A notable gap remains in exploring this relationship from the perspective of cross-border capital flow intensity. Specifically, most extant research relies on empirical verification using macro-level monthly data and cross-border panel data. However, the absence of comprehensive and in-depth micro-level empirical evidence has resulted in inconsistent conclusions and a limited understanding of the underlying mechanisms. This paper employs China’s international balance of payments to quantify cross-border capital flow intensity, applying the Conditional Value at Risk (CoVaR) method to calculate the systemic risk of commercial banks. The empirical findings reveal that heightened cross-border capital flow intensity significantly diminishes systemic risk. In particular, intensified flows of securities investment capital and other forms of investment capital substantially reduce systemic risk. Although the intensity of direct investment capital flows also contributes to lowering systemic risk, the effect is not statistically significant. Furthermore, the study identifies bank credit scale and credit concentration as pivotal channels through which cross-border capital flows impact systemic risk. Increasing the intensity of cross-border capital flows helps expand banks’ credit scale and reduce credit concentration, which in turn lowers systemic risk. The effective transmission channel can be summarized as: cross-border capital flow intensity → credit scale/credit concentration → systemic risk of commercial banks. Compared with large state-owned banks, small and medium-sized banks exhibit a greater capacity to absorb cross-border capital, resulting in a more pronounced reduction in systemic risk. This paper contributes to existing research in two key dimensions. First, it investigates the theoretical mechanisms through which cross-border capital flow intensity influences systemic risk in commercial banks, expanding upon prior literature by examining the role of different capital flow structures. Second, it introduces a novel measure—capital flow intensity and structure—rather than focusing solely on the total volume of cross-border capital flows. Empirical analysis reveals the varying impacts of flow intensity and its structural components on systemic risk.