A stable systemic risk ranking in China's banking sector: Based on principal component analysis

In this paper, we compare five popular systemic risk rankings, and apply principal component analysis (PCA) model to provide a stable systemic risk ranking for the Chinese banking sector. Our empirical results indicate that five methods suggest vastly different systemic risk rankings for the same bank, while the combined systemic risk measure based on PCA provides a reliable ranking. Furthermore, according to factor loadings of the first component, PCA combined ranking is mainly based on fundamentals instead of market price data. We clearly find that price-based rankings are not as practical a method as fundamentals-based ones. This PCA combined ranking directly shows systemic risk contributions of each bank for banking supervision purpose and reminds banks to prevent and cope with the financial crisis in advance.